The laws of international exchange

Anwar

Shaikh

Comparative costs

There is no proposition so central to orthodox

theories of international trade as the so-called

Law of Comparative Costs. From Ricardo to

Hecksher-Ohlin to Samuelson, in one guise or

another, the basic principle has remained un-

changed. Even the relentless search of neoclas-

sical economics for a state of perfect triviality

has not emptied this particular principle of its

content; from the time of its derivation by Ri-

cardo to its current incarceration in an Edge-

worth-Bowley Box, this law has continued to

dominate the analysis of international trade.

Even

and this is surely its greatest triumph to

date

even its public exposure as having been

all along the hidden law behind modern marriage

has not (yet) led to its complete discreditation?,

It is not surprising that a principle capable of

surviving “improvements’

’

such as the above

has managed to also withstand repeated attacks.

Before we touch upon these attacks, however, it

will be useful to briefly describe the law itself.

There are in fact two distinct propositions as-

sociated with this law, and the tendency to con-

flate the two has been a potent source of confu-

sion in the literature.

Let us begin by considering a country in

which cloth and wine are produced and sold at

the price ratio

(p,/p&

in the domestic market.

Across the channel is another country in which

cloth and wine are

alsn

produced and sold lo-

cally, generally at a different price ratio

(pJp&

than in the first country. Suppose the price ratios

are different. Then, if the price of cloth relative

to wine is lower in the first country than in the

second, the price of wine relative to cloth must

be lower in the second; that is, in each country

one commodity will be relatively cheaper.2

The first proposition is a prescriptive one. It

asserts that if each country were to export its

relatively cheaper commodity and import the

other,

c~?d

lj’ the terms of trade between cloth

and wine were to settle between

(p,./puJ1

and

(p,./~~)~,

then each country-as-a-whole would

gain from trade. That is, by concentrating its

production towards the relatively cheaper good

and exporting part of that good in exchange for

the other good, each country would end up

better off, in the sense that through trade a given

set of inputs could be translated into more out-

puts than before trade.

It is very important for our subsequent discus-

sion to note that the above proposition in no way

depends on the absolute costs of wine and cloth

in the two countries. Thus, even if one of the

two nations were absolutely more efficient in

producing both commodities

so that both wine

and cloth were absolutely cheaper in one

country than in the other3

“trade can be bene-

ficial if the country with the all-around inferior

efficiency specializes in the lines of production

where its inferiority is slightest, and the country

with all-aromd superior efficiency specializes in

the lines of its greatest superiority.” (Yeager,

1966, p. 4) Therefore, this proposition argues

that ij’under the right conditions (differences in

pretrade relative prices, the “correct” pattern of

exports, and an intercountry terms of trade in

the “appropriate” range), each country, no

mutter how hurckwwd its

techwlqy,

would

benefit from trade. Absolute costs are of no mo-

ment; all that matters is relative costs. Hence

the term “the principle of comparative

advan-

tage. ’ ’

Taken by itself, the first principle says nothing

at all about what actually happens in interna-

tional trade. In fact, it would appear to be largely

I wish to express my thanks to Arthur Felberbaum,

Robert Heilbroner, Edward Nell, Michael Zweig, John

Weeks, and particularly to Adolph Lowe, for their

comments, criticisms, and above all their support

throughout this endeavor.

204

irrelevant to the real process. Exports and im-

ports, after all, are undertaken by capitalists for

the sake of profit, not gains to the “nation.”

Profits, moreover, depend crucially on absolute

money costs: the lower-cost producer is always

in a position to beat out its rivals. In trade

between two advanced countries, each country

might be expected to have some absolutely effi-

cient producers, so

thrtt

in this case absolute ad-

vantage and comparative advantage coincide:

each country will then have one commodity for

which it is the lowest-cost producer and hence

the exporter. But how could a backward country

in competition with an advanced one possibly

hope to enjoy the “gains from trade” when both

its producers are the higher-cost producers‘?

This is where the second proposition comes

in. It is a descriptive proposition, for it asserts

that in free trade the patterns of trade

cr~‘N

in fact

be regulated by the principle of comparative ad-

vantage

regardless of any absolute differences

in levels of productive efficiency. The crucial

element in this step, therefore, is the presence of

some

crutomutic

mechunism

that will cause free

trade undertaken by profit-seeking capitalists to

converge to this result.

The sum of the two propositions is what is

generally called the “law of comparative costs”:

if permitted, free trade will end up

king

rcgu-

lated by the principle of comparative (not abso-

lute) advantage, and the resulting gains from

trade will be shared among the trading partners.

have been; the real point was that no nation need

be afraid of free trade, for it humbles the mighty

and raises the weak. Something like God, only

quite a bit more reliable.

The more recent formulation of the law, the

Hecksher-Ohlin-Samuelson

Zuny

oJ’

f&or

pro-

pnvtkms,

leaves intact the basic principle set out

by Ricardo. However, whereas Ricardo identi-

fied

the

real social cost of producing a commod-

ity as the total labor-time that went directly or

indirectly into production, the neoclassical for-

mulation insists upon defining the social cost(s)

of a commodity to the nation-as-a-whole as

being the commodities it (the nation) must

forego, at the margin, in order to produce an

extra unit of the commodity in question. Since

this concept of cost as opportunities foregone

cannot be used if there are unemployed

resources

for then any given commodity can

be produced without the national individual

(Uncle Sam) having to give up any others, that

is, without any opportunity cost

neoclassical

theory finds it necessary also to assume full em-

ployment. The assumption of full employment is

therefore just the,hidden dual of the concept of

opportunity cost.

In the original form given to it by David Ri-

cardo,

the crucial automatic mechanism was the

relation between the quantity of money and the

level of prices: the so-called

chsicul

yucrntity

theory

n$ money. In Ricardo’s famous example,

for instance, Portugal can produce both wine

and cloth more cheaply than England. Trade

between England and Portugal would therefore

initially be all in one direction, with Portugal ex-

porting both wine and cloth, which England

would have to pay for directly in gold since its

products were noncompetitive with Portugal’s.

But now the crucial equalizing mechanism

comes into play: the outflow of gold from Eng-

land is a decrease in its money supply and would

therefore lower all money prices in England;

similarly, the inflow of gold into Portugal would

raise all money prices there. As long as the trade

imbalance persisted, this mechanism would con-

tinue to make British wine and cloth progres-

sively cheaper, and Portuguese wine and cloth

progressively more expensive, until at some

point England could undersell Portugal in one of

the two commodities, leaving Portugal with the

relative advantage in the other. The exact deter-

mination of the terms of trade was understand-

ably not important to Ricardo, nor should it

The second distinguishing characteristic of the

neoclassical version is that, whereas Ricardo

bases the patterns of internatiorlal

sywiali~ation

on international differences in relative costs,

whatever their origin, the Hecksher-Ohlin for-

mulation attempts to tie the cost differences

themselves to a single dominant factor: the na-

tional endowments of labor and capital. Thus,

leaving absolute advantages aside, this approach

would argue that, given any two countries, the

capital-abundant country (the one having the

higher national capital-labor ratio) would tend

to be able to produce capital-intensive goods

relutively

more cheaply than the labor-abun-

dant country. Conversely, the labor abundant

country (the one having the lower national

capital-labor ratio) would of course have the

relative advantage in labor-intensive production.

It follows therefore that capital-abundant coun-

tries (read industrialized capitalist countries)

will and, for reasons of efficiency and the good

of the world-as-a-whole, should, specialize in

capital-intensive (secondary) products, ex-

porting them in return for the labor-intensive

(primary) products of the labor-abundant (un-

derdeveloped capitalist) countries: In other

words, the existing differences between devel-

oped and underdeveloped capitalist countries

are

effic~2nf

from the point of view of the

world-as-a-whole. Poor Ricardo dared only to

claim that free trade is better; neoclassical

theory can boldly claim that international in-

equality is best. No wonder that Gary Becker

206 Anwar Shaikh

found in this analysis so convenient an explana-

tion for institutionalized sexism (Becker, 1973,

1974).

What is perhaps most striking about the neo-

classical approach is that it completely assumes

away any possibility of absolute advantage on

the part of any one country: wine production in

England and wine production in Portugal are as-

sumed to be characterized by exactly the same

production function; similarly, cloth too has its

own universal production function. The central

thrust of Ricardo’s argument was of course that

free trade leads to gains even for countries that

are absolutely inefficient in comparison to their

trading partners; in the Hecksher-Ohlin version

all this is sacrificed to the need to prove that pat-

terns of international specialization are conse-

quences of the various national “factor endow-

ments

.’

’

It is interesting to note, however, that

when Leontief’s famous empirical test of the

Hecksher-Ohlin model appeared to refute it,

“Leontief rationalized this result by hypothe-

sizing that American labor is three times as pro-

ductive as foreign labor” (Johnson, 1968, p.

89)4

that is, he resorted to the argument that the

U.S. pattern of trade could be explained by its

absolute advmtuge over its trading partners! A

fuller discussion of Leontief’s study is at the end

of the next section, “Orthodox critiques.”

In general, modern presentations of the law of

comparative costs make no reference to the

actual mechanisms by which the law is to be

brought about. The emphasis is almost entirely

on the gains from trade that would be achieved if

trade were to be based on comparative costs;

nonetheless, because these ‘discussions are also

intended to be descriptive, “the implicit as-

sumption is [made] that the adjustment of money

wage and price levels or exchange rates required

to preserve international monetary equilibrium

do actually take place . .

.”

(Johnson, 1968, p.

84) As we shall see later, in the second major

section, modern derivations of comparative

costs rely on what are essentially variants of Ri-

cardo’s mechanism: in all cases, the very nature

of the desired solution requires monetary vari-

ables (price levels and/or exchange rates) to ad-

just in such a way as to transform absolute ad-

vantage into a comparative one. In all versions,

therefore, given England’s absolutely lower effi-

ciency and hence initially higher costs of pro-

duction, its ensuing trade deficit must somehow

result in a lowering of English prices while Por-

tugal’s trade surplus must lead to a raising of its

prices

until at some point each country has a

cost advantage in only one commodity.

The critique of comparative costs conse-

quently requires us to contrast four basic

theories of money: the Hume specie-flow ver-

sion of the auantitv theorv (Ricardo). the cash

balances version of the quantity theory, the

Keynesian determination of prices through the

level of money wages, and Marx’s theory

money. In order to do this, we need a common

ground of some sort.

Fortunately for us, most of the history of in-

ternational trade, and hence most of its theory,

has been dominated by precious metals as the

standards of both domestic and international

money.5 Thus, in discussions of the theories of

international trade, we always find a common

theoretical ground

their operation under the

so-called gold standard (The discussion of fixed

versus flexible exchange rates and their relation

to the gold standard is reserved for the second

major section). By contrasting various theories

on this basis, differences in the theories them-

selves may be separated from differences in

institutional arrangements. And because neither

the Ricardian nor the neoclassical versions of

the law of comparative costs claim to be depen-

dent on any specific monetary institutions, the

gold standard is a valid common ground. So

much so, in fact, that the neoclassical treatment

of the adjustment mechanism under the gold

standard is virtually identical to that of Ricardo:

“The adjustment mechanism under the gold

standard . . .was more or less automatic in

the sense that central banks were expected to

react to gold outflows and inflows by

restrictive and less restrictive monetary policies,

respectively, which would in turn react upon

price and wage levels, lowering them in the defi-

cit countries and raising them in the surplus

countries. These price changes, in turn, were ex-

pected to shift expenditure from surplus to defi-

cit countries, thus reducing and eventually elimi-

nating the disequilibrium . . . the theory is

correct in its broad outline even if its practice has

been somewhat oversimplified” (Mundell, 1968,

pp. 8-9).

We find, therefore, that, in spite of their much

discussed differences, the fundamental structure

of both the Ricardian and neoclassical versions

of the law of international exchange is the same:

in both cases it is relative advantage and not ab-

solute which determines the pattern of trade: in

both cases trade is mutually beneficial (or, at

worst, not harmful) to each country viewed as a

single classless entity; and, above all, in both

cases the mechanism which brings about the

successful operation of the law is essentially the

same.

Orthodox critiques

The law of comparative costs, whatever its

form, has always been associated with the advo-

cacy of free trade: Ricardo’s own development

The laws of international exchange

207

of this principle was in fact part of his polemic

against the corn laws (laws which prevented the

free import of cheap corn into England), and

from that time onward free traders of all kinds

have based their own arguments on those of Ri-

cardo.

It is not surprising, therefore, to find that

the primary thrust of critics has been to attack

not so much that part of the law which argues

that the pattern of trxle will depend

cnmpra-

tive costs, as it has been to attack the proposi-

tion that free trade is efficient, mutually benefi-

cial, and good for the world-as-a-whole.

Frank Graham, for instance, focuses on the

assumption of constant cost, which he argues is

essential to the operation of the law; thus, by

working with combinations of increasing and de-

creasing costs, he is able to provide counterex-

amples in which free trade and specialization are

harmful to every one of the countries involved

(Emmanuel, 1972, p. XV)? In a similar vein,

Keynesians often attack the assumption of full

employment, which, as we have seen, is a neces-

sary complement of the nemlussicul versions of

the law; here, it is possible to construct coun-

terexamples in which hypothesized combina-

tions of unemployment and inflation may under

certain circumstances have a feedback effect on

the operation of the law and thus counteract it.7

Finally, there exists a whole series of modifica-

tions of the law, based on the analysis of interna-

tional differences in taste, on the existence of

tariffs and quotas, transportation costs, customs

unions, and so on.

In spite of their apparent opposition to the

law, all the above criticisms have this in

common: implicitly (and often explicitly), they

accept the law us being theoretically

vulid

on its

own grmnds. Instead, they seek to modify one

or more of these grounds so as to provide theo-

retical counterexamples. It is therefore not at all

surprising that these criticisms are usually

viewed not as refutations of comparative costs,

but rather as its further development; typically,

in neoclassical textbooks, the doctrine of com-

parative costs is presented as the fundamental

principle underlying international trade, with the

foregoing criticisms as extensions and concreti-

zations of it.

Orthodox critics, however, have yet another

recourse

attack by means of data. Here, the

two examples most often cited are the results of

Leontief s famous study (Leontief, 1953, 1956,

1958),

now known as the “Leontief paradox,”

and those of the Arrow-Chenery-Minhas-Solow

study, which gave rise to the so-called factor re-

versal issue (Arrow, et al., 1961). We will exam-

ine each in turn.

In the early 195Os, Leontief set out to empiri-

cally test the central proposition of the neoclas-

sical version of the law of comparative costs.

Beginning with the fact that the United States

was by all accounts a capital-abundant country,

Leontief reasoned that those goods which

America exported should be more capital inten-

sive than those which it replaced by imports.

What he actually found, however, was just the

opposite: “contrary to expectations United

States exports are more labor-intensive . . .

than

TJnited

States imports” (Johnson, 1968.

p. 88).

Neoclassical theory, it will be recalled, takes

it for granted that, in accordance with Ricardo’s

law, each country will export the relatively

cheaper commodity. What the Hecksher-Ohlin-

Samuelson model seeks to do is to go one step

further and argue that this relatively cheaper

commodity will in fact be the one which uses

proportionately more of the relatively abundant

factor of production: hence the theoretical ex-

pectation that the capital-abundant country will

export the capital-intensive commodity. In order

to make the above links, however, it is neces-

sary to assume away the possibility of absolute

advantage. In neoclassical terms, this means

that the production function for a given com-

modity, say wine, is assumed to be the same no

matter whether wine is produced in England or

in Portugal: thus wine could always be produced

at the same cost everywhere. It is not slqyising,

therefore, that, when faced with the unexpected

results of his study, Leontief was led to chal-

lenge precisely that assumption.

Leontief’s challenge did not go unanswered

for long. In 1961, Arrow, Chenery, Minhas, and

Solow published a study in which they argued

that cross-country comparisons of pruduc;tiun

functions did indeed indicate that American pro-

duction was systematically more efficient than

others: in other words, that the United States

had an absolute advantage (Arrow, et al., 1961;

see note 4 of this chapter). These results

prompted an investigation of the properties of

the Hecksher-Ohlin-Samuelson model when

production functions differ across countries,

which in turn led to the theoretical possibility

that capital-abundant countries might

t=xpur-t

labor-intensive commodities (Minhas, 1962).

Distressing as these results are to the propo-

nents of the Hecksher-Ohlin-Samuelson model,

they have little bearing on the principle of com-

parative costs, for (as we have already noted)

the model begins by assuming the Ricardian pat-

tern of specialization according to comparative

costs and then attempts to link this pattern to the

“factor endowments” of the nations involved.

At best, therefore, the above empirical and the:o-

retical paradoxes merely sever the attempted

link between national factor endowments and

the pattern of trade. They

leave

the Ricurdian

lcrw

untouched.

208 Anwar Shaikh

Finally, we come to those critics who attack

the law as being

yzo

Ic)pzgv~

valid, because one or

more of its premises no longer hold in today’s

world. Here, we find that the empirical criticism

of the law, and particularly of the efficacy of free

trade, is based on modem developments such as

the loss of wage and price flexibility, the demise

of the gold standard, the death of competition,

and systematic interference by governments?

For our purposes, it is sufficient to note that this

historical school of orthodox criticism (which,

as we shall see shortly, has its Marxist counter-

parts) implicitly accepts the law as valid where

its premises

primarily those involving competi-

tive capitalism

can be taken to hold. On its

own grounds (which in this case involve a partic-

ular historical epoch), the law is accepted as

valid.

In sum, we find that so far as orthodox criti-

cism is concerned (whether it be theoretical,

empirical, or historical), the basic principles of

the doctrine of comparative costs emerge rela-

tively unscathed.

Marxist critiques

Given Marx’s exhaustive treatment of Ricardo’ s

theory of value, it would seem that Marxists

long ago have extended his analysis in one way

or another to deal with the Ricardian law of com-

parative costs. Curiously enough, this is not so:

instead, the issue is seldom mentioned (Mandel,

1968; Sweezy, 1942). Where it is discussed, Ri-

cardo’s attempt to determine the limits of inter-

national exchange is acknowledged only impli-

citly by accepting one of his central conclusions:

whereas the law of value regulates exchanges

within a competitive capitalist economy, it does

not do so between such economies (Sweezy,

1942, p. 289).

Why this striking silence? In part, it arises

from the fact that Marx himself never directly

accepts or rejects Ricardo’s principle of compar-

ative costs. This appears to be a puzzle until we

realize that,

Marx, RiCab93

r;hapte~-

foreign trade is essentially a special analysis of

merchant capital: “The great economists, such

as Smith, Ricardo, etc., are perplexed over mer-

cantile capital. . . .[Wlhenever they make a

special analysis of merchant’s capital, as Ri-

cardo does in dealing with foreign trade, they

seek to demonstrate that it ueutes no value (and

consequently no surplus-value). But whatever is

true of foreign trade, is also true of home trade”

(Marx, 1967, Vol. III, p. 324, emphasis added).,

Historically, of course, merchant’s capital

precedes industrial capital. But in the capitalist

mode of production it is industrial capital which

is dominant; Marx’s analysis therefore begins

with the latter and only arrives at the former

(merchant’s capital) in Volume

III

of Capital. It

is industrial capital which is involved in the pro-

duction of commodities, and hence in the

eye-

dorz of value and surplus value. Merchant capi-

tal, on the other hand, is involved in the trading

of commodities; it therefore accomplishes the

ttunsfer

of value and of surplus value, nationally

and internationally. It follows from this that in

order to understand its role within capitalist

(rather than precapitalist) modes of production,

merchant capital can be introduced only after

value and surplus-value have been properly

developed. Moreover, because the essential cir-

cuit of rucr&itut capital involves “buying cheap

and selling dear,” the question of the determina-

tion of prices is critical; and this in turn means

that money

the connection between value and

price, surplus-value and profit

must be ade-

quately developed prior to the analysis of mer-

chant capital. This last point bears repetition: a

correct analysis of the role of money is abso-

lutely crucial to an understanding of the laws of

commodity trade. This applies whether the

trading is done nationally or internationally.

It was of course Marx’s original intention to

extend the analysis presented in the three vol-

umes of

Cupid

to the treatment of international

trade and the world market, each to be dealt

with in separate volumes (Marx, 1973, p. 54).

But this never happened; instead, at the time of

Marx’s death even Volume III of Capitd existed

only as a “first extremely incomplete draft”

(Marx, 1967, Vol. III, p. 2). Nonetheless, as I

shall attempt to prove in this chapter, the devel-

opment of the law of value in Cupitd contains all

the necessary elements for its extension to inter-

national exchange. As we shall see, Ricardo’s

law

comparative costs follows immediately

from his law of value and his theory of money;

and Marx has provided us not only with detailed

criticisms of Kicardo on both value and money,

but also with his own formulations of these sub-

jects. The principal task of this paper is, there-

fore, to attempt an extension of the

Marxian

law

of value to international exchange.

The paucity of references in Marx to interna-

tional commodity trade is, however. only part of

the explanation for Marxist ambivalence on the

subject. Another, equally important, part lies in

the fact that ever since the publication of

Lenin’s

Irnperiulism

(Lenin, 1939) it has become

a Marxist commonplace to assert that capitalism

has entered its monopoly stage. Now, in the

case of monopoly, it is widely accepted by

Marxists and non-Marxists alike that laws of

price formation must be abandoned (Sweezy,

1942, pp. 270-l): “the most serious aspect of

The

laws

international exchange

209

monopoly from an analytic point of view, is that

the discr.epancies between monopoly price and

value are not subject to any general rules

(Sweezy, 1942, p. 54). What remain therefore

are the basic social relations of capitalist com-

modity productions, and it is to the various man-

ifestations of these that the theory of monopoly

capital turns.

Of course, Once the Jaws nf price formation in

general are thrown out, the laws of international

price formation necessarily follow. The focus

shifts instead to the domestic and international

rivalries of giant monopolies, to their political in-

teraction with various capitalist states, and to

the antagonisms and conflicts between these

states themselves

in other words, to imperial-

ism as an aspect of

mo~~opoly

capitalism. The

law of value, like competitive capitalism itself,

fades into history.

It is beyond the scope of this chapter to at-

tempt a proper construction of a Marxist con-

cept of monopoly, so as to confront the views

mentioned here. It must be noted, however, that

even an acceptance of the aforementioned views

in no way puts to rest the ambivalence among

Marxists with regard to Ricardo’s law, any more

than it resolves the recurring conflicts on the

transformation problem, the theory of wages,

etc.; instead, it merely sidesteps them? Like

their orthodox counterparts, these Marxist criti-

cisms leave the law of comparative costs still

standing

in the case of competitive capitalism,

at least.

Emmanuel and unequal exchange

In recent years, this whole issue has been once

again brought sharply into focus by Arghiri

Emmanuel’s challenging new work entitled

Unq44al

Exchange: A Study

the Impetkdism

uf Trade (Emmanuel, 1972). In this book, Em-

manuel sets out to overthrow the pernicious

doctrine of comparative costs by attacking what

he argues is its most fundamental assumption

the immobility of capital between different

countries. lo

In Ricardo’s original derivation of

the law, Emmanuel notes, Portugal is by as-

sumption absolutely more efficient than England

in both wine and cloth; hence, if Portugal and

England were mere regions of the same nation,

capital invested in Portugal would be consider-

ably more profitable, so that eventually the ab-

solute advantage of the Portuguese region would

lead to the cessation of both wine and cloth pro-

duction in the English region. But, says Ricardo,

Portugal and England are separate nations, and

in genera1 this erects significant barriers to the

mobility of capital between them, barriers which

he notes he would be “sorry to see weakened”

(Ricardo, 1951, p. 136). In Ricardo, therefore,

the analysis of flows between nations is essen-

tially confined to commodity flows, and it is his

contention that in this case Portugal’s absolute

advantage is of no lasting consequence; in the

end, only relative advantage matters, so that

each nation is assured of having at least one

exportable commodity to specialize in.

Emmund

ucwpts Ricuudo’s luw

its

OWM

grclunds (Emmanuel, 1972, pp. xxxii-iii). But,

he argues, its fundamental structure results from

the fact that Ricardo restricts his analysis to

those situations in which only commodities flow

between countries. The modern world, on the

other hand, is characterized by massive interna-

tional movements of capital, in addition to those

of commodities (Emmanuel, 1972,

xxxiv). To

Emmanuel. therefore, the essential question is:

how do the international movements of capital

affect the previously valid Ricardian law of in-

ternational exchange ? In other words, what is

the appropriate form of this law in the modern

world?]

The emphasis on international capital

movements is of course not unique to Em-

manuel. In Marxist analysis of imperialism, for

instance, the internationalization of capital plays

an absolutely central role; even modern day pro-

ponents of the law of comparative costs often go

on to treat the issue of foreign investment and in-

ternational capital mobility. In general, how-

ever, these existing analyses treat capital flows

as a factor strictly separate from the laws of in-

ternational commodity trade (Kenen, 1968);

what Emmanuel proposes to do instead, is to

in-

tqg-ate thib ulvvtxnent into the law itsrslf and, by

so doing, separate the determination of the laws

of international exchange from any apologetic

for free trade. To Emmanuel, “modern free

trade” is characterized by both capital

tinci

com-

modity flows between nations. It is his avowed

intention, moreover, to demonstrate that it is

precisely the laws of this modern free trade,

which, when applied to the trade between devel-

oped capitalist countries and the so-called Third

World,

give rise to a variely

0lY

phwwi~na

normally associated with the term “imperial-

ism” :

Imperialism is the highest stage of free

competition.

The first step in understanding Emmanuel’s

analysis is to pose the question:

M?!ZJJ

does capital

flow between countries? And the answer, of

course, is because there exists a difference in

profitability between the countries involved. So

the question becomes, what are the intrinsic de-

terminants of this difkrence?

Let us begin with the selling price. In general,

international capital produces for the

~~~rld

market; if we ignore transportation costs (as

210

Anwar

Shaikh

being secondary factors in determining the pat-

tern of trade), then, no matter where production

is located, the selling price for a given type of

product is more or less the same

it is the world

market price. Moreover, because commodities

do flow between countries, technology is also in-

ternationally mobile: aside from transportation

costs, a given type of plant and equipment can

be located for more or less the same cost in any

country accessible to international capital.

But

if the selling price is more or less independent of

the international location of production, and the

cost of a given plant and equipment is too, then

what gives rise to international differences in

profitability? The answer, it would seem, could

only be: the abundance of natural ,resources

and/or the cheapness of wage labor.

As long as the question is posed in terms of

WZJJ

two countries accessible to international

capital, it is not possible to narrow down the list

of factors any further. What Emmanuel has in

mind, however, is not the relation between just

any two countries but rather the relation

between developed capitalist countries of the

world and the so-called Third World, that is, the

underdeveloped, capitalist-dominated countries.

And in terms of this division of the capitalist

world, the overwhelmingly significant difference

arises from

the

rclativc

chcapncss

of wage labor

in the Third World. The United States is at least

as rich in natural resources as India, but it is not

uncommon to find Indian wages to be one-

twentieth those in the United States. Emmanuel

estimates that “the average wage in the devel-

oped countries is about thirty times the average

in the backward countries” (Emmanuel, 1972,

p. 48). According to Emmanuel, therefore, cap-

ital flows from the developed to the underdevel-

oped capitalist countries primarily to take ad-

vantage of the enormous difference in the cost

of labor-power.

We come now to Emmanuel’s analysis of the

effects of these international capital movements.

Wages, it will be remembered, are enormously

lower in the Third World, so that, other things

being equal, profit rates for local capitalists

would be very high. If local capitalists tended to

reinvest heavily, or if through government ac-

tion these profits could be taxed away and rein-

vested, high profit rates would imply a high rate

of growth of Third World countries

leading to

rapid development, a narrowing gap between

rich and poor countries, and, above all, do-

mestic control of domestic resources. Whatever

else was wrong, there would at least be no

imperialism.

But the actual pattern appears to be the exact

opposite of the above; what we observe, Em-

manuel notes, is stagnation, a widening gap

between rich and poor countries, and wide-

spread foreign domination of Third World coun-

tries (Emmanuel, 1972, pp. 262-3). The major

cause of all this, he argues, is foreign invest-

ment: the very same low wage/high profitability

combination which

coulc2’

make rapid develop-

ment possible in the Third World is exactly the

factor that also makes these countries so very

attractive to foreign capital. Because foreign in-

vestment originates in countries in which the

average rate of profit is much lower than it is in

the Third World, foreign capitalists are generally

willing to accept much lower rates of profit than

local capitalists; they therefore invade local

markets, driving out local capitalists, drawing

down prices and thus lowering the average rate

of profit in the Third World. In this way the

surplus generated in the Third World is siphoned

off by foreign capital, to the detriment of the

Third World and to the benefit of the developed

capitalist countries. As a consequence, in the

developed capitalist world foreign investment

leads to higher profit rates, higher prices, and

higher growth: hence prosperity and full em-

ployment. In the Third World, on the other

hand, the very same movement results in low-

ered prices, lowered profits, and lowered

growth: hence stagnation, unemployment, and

foreign domination (Emmanuel, 1972, p. 265).

It is Emmanuel’s great merit to have revived

the important issue of the laws of price forma-

tion in international exchange, and in particular

to do so in a way that suggests that it is not nec-

essary to abandon the laws of competition in

order to be able to understand the intrinsic de-

terminants of modem imperialism. But there are

significant weaknesses in the manner in which’

Emmanuel himself deals with this issue. To begin

with, though he uses Marxist categories such as

value and surplus-value, the methodological

basis on which his work rests, and from which

he derives his implications, is fundamentally dif-

ferent from Marx’s; hence his political conclu-

sions, though radical, are as different from

Marx’s as were, for example, those of a rad-

ical contemporary of Marx

Pierre-Joseph

Proudhon.16

This, and the fact that his analysis

of imperialism runs counter to that of Lenin, has

led to a largely hostile reaction to his work

among some Marxists (Bettelheim, in Em-

manuel, 1972; Pilling, 1973).

Many of the criticisms of Emmanuel are quite

telling. But the challenge implicit in his work re-

mains unanswered by those Marxists who are

content to merely locate the distance between

Emmanuel and Lenin.

These little exercises,

however illuminating, manage to neatly avoid

two central questions. First of all, at the level of

abstraction that Marx maintains in his three

vol-

The laws of international exchange 211

umes of Capitol, is it really true (as many

Marxists appear to believe) that Ricardo’s law of

comparative costs is the international form of

Marx’s law of value? Second, is it true (as Em-

manuel argues) that when the export of capital

becomes significant the Marxian law of interna-

tional value is transformed into Emmanuel’s law

of unequal exchange?

Posed in this way, these questions have

ex-

x~ly

tht:

bame

thrsoretical

status as that of any

other law developed by Marx in Ccrpital. Marx

lays bare the structure of capitalism on the basis

of its “ideal” form, that of free competition, pre-

cisely because it is this form that gives the freest

expression to the immanent laws of the system.

It is on this basis that Marx derives exploitation,

crises, concentration and centralization, and a

host of other phenomena characteristic of capi-

talism. Is it not curious, then, that whereas free

and equal

exc;hangt:

within

a capitalist nation

gives rise to all of these phenomena, it does not

appear to do so when it takes place between cap-

italist nations

How is it that whereas Marx

derives the unevenness of development within a

capitalist nation on the basis of free competition,

Marxists generally have to resort to monopoly to

explain the unevenness of development het~~~n

capitali

turn to st nat

next. ions? These are the questions we

Towards a Marxist law of international

exchange

Over a period of many years, the phenomena of

international uneven development have come to

be extensively studied and well documented

(Amin, 1974; Nayter, 1972; Jale, 1969;

Mag-

doff, 1969; Payer, 1974). And, as we have seen,

the existence of these phenomena has generally

been attributed to the internationalization of

capital

that is, direct investment by the rich

capitalist countries in the Third World. Ac-

cording to standard Marxist analysis, this inter-

nationalization itself arises out of the monopoly

stage of capitalism: for Emmanuel, on the other

hand, it is merely a fuller development of the

laws of competitive capitalism. In either case,

the export of capital is the lynchpin of the theory

of imperialism.

In addition to their common emphasis on in-

ternational capital movements, both of the

above theories of uneven development accept

Ricardo’s law of comparative costs as being

valid on its own grounds. In fact, as we shall see,

this law is in a sense the “hidden secret” of the

above theories: the law insists that free trade

between advanced and backward countries will

be mutually beneficial and productive of even

development. It is precisely because they are

unable to refute this law that the above theories

are forced to put the whole burden of uneven

development on capital movements.

As long as Ricardo’s law is left standing, the

well-known phenomena of uneven development

appear inexplicable without some additional

factors: monopoly, foreign investment, political

power, conspiracy, etc. Now it can hardly be

dcnicd

that these factors exist and are important

to any analysis of uneven development on a

world scale. But the question is: are these

factors in themselves the intrinsic causes, or

does the cause lie elsewhere?

In this chapter it will be argued that the phe-

nomena of international uneven development

arise directly from the so-called free trade of

commodities. That is, just as Marx derives the

concentration and centralization of capitals (and

hence

their uncvcn development) from free and

unrestricted commerce within a capitalist na-

tion, so too is it possible to derive the phenom-

ena of imperialism from free and unrestricted

commerce between capitalist nations. More-

over, just as Marx’s law of value is the basis for

his analysis of uneven development within a

capitalist nation, so too will the international

form of this law be the basis of the analysis of

uneven development among capitalist nations.

What we will see, in cffcct, is that

Ricu~~&‘s

ILO+

uJ’

compawtive costs is fhlse on its

very

own

grounds.

Once this great stumbling block has been

overcome, the phenomena of imperialism will

appear in an entirely new light. Free trade,

rather than negating the inequalities between na-

tions, will be seen to deepen them. The absolute

advantages of the developed capitalist countries

(such as Portugal in Ricardo’s famous example)

over the underdeveloped capitalist countries

(England) will nut be reduced to a compara-

tive-advantage-for-all, as free traders have so

long asserted. On the contrary, free trade it-

self will ensure that the advanced capitalist coun-

tries will dominate international exchange,

and that the less developed nations will end up

chronically in deficit and chronically in debt.

If in fact free trade is uneven development,

then the question arises: what are we to make of

the export of capital, which plays so prominent a

part in most other theories of imperialism? Does

it offset, or does it enhance, the inequalities

arising from free trade?

The answer, it turns out, is that it does both.

Foreign capital may improve an underdeveloped

country’s trading position (and hence offset its

trade deficits) by modernizing and expanding its

export capabilities; but this will be undertaken

precisely under the control and domination of

212 Anwar Shaikh

foreign capital, and only insofar as it is to its own

benefit. This, as we shall see, will have impor-

tant implications.

A note on the structure of this chapter

In order to undertake the criticism of the law of

comparative costs, we must first see precisely

how it is derived. The second major section

therefore contains a brief exposition of Ri-

cardo’s theory of value, his theory of money,

and then of their interaction in the infamous law.

The next step is to set up a similar path in

Marx. In the third major section, first Marx’s

theory of value (and his criticism of Ricardo’s) is

outlined, and then his theory of money (with his

criticism of Ricardo’ s).

The first part of the fourth major section

unites the two theories in overthrowing the Ri-

cardian law of comparative costs: that is, we see

that when taken together they imply a determi-

nate theory of international exchange which

flatly contradicts Ricardo’s law

OYI

its very

owy1

grounds. It is in this section that the intrinsic

cause of international uneven development is

seen to be free trade itself, quite independently

of the traditional villains such as monopoly,

foreign investment, political power, etc.

The second half of the fourth major section

takes up the question of the export of capital.

Here, it becomes possible to see how and why it

is the very unevenness of development (as it is

reproduced and deepened by commodity trade),

which in turn posits foreign investment as both

the salvation

n~ci

at the same time the damnation

of the underdeveloped capitalist countries. It is

also possible at this point to see not only why

Emmanuel’s analysis of imperialism is incorrect,

but also why his proposed solution would be

useless.

At all times it is important to keep in mind that

the very structure of the theory of international

trade necessitates an introduction to theories of

value and theories of money before we can even

begin the analysis of trade. Obviously, to do jus-

tice to Ricardo or Marx on either of these scores

could easily require volumes. And yet, we must

cover both value and money, in both authors, if

we are to proceed at all!

Within the confines of a chapter this task can

be undertaken only if one sticks to the bare es-

sentials. Consequently, in what follows, brevity

has been attempted in the exposition of Ri-

cardo’s and Marx’s theories. Particularly when

dealing with Marx, it is a great temptation to not

only present and document the relevant struc-

ture of his analysis but to also defend it against

the misrepresentations which are so popular

(and so convenient) with orthodox theorists, or

at least to contrast his analysis with theirs.

Nonetheless, I have tried to avoid doing this: the

primary comparison which can properly be

made here, and that only in a largely expository

way, is the one between Ricardo and Marx. The

rest must await another occasion. But let this

much be clear: what follows is definitely not in-

tended as a mere exercise in the history of eco-

nomic thought. So-called modem economic

theories of value and money are no more ca-

pable of withstanding Marx’s criticism than

were the classical theories. In a sense, the oppo-

sition between Marx and Ricardo explored in

this paper is the historical prelude to the more

modern confrontation.

icardo’s derivation

comparative costs: of the law of

The Ricardian law of price. Ricardo held that the

principal problem facing political economy in his

day was the determination of the laws which reg-

ulate the distribution of the product of (capital-

ist) society among the three great classes: that

is, the laws which determine “the natural course

of rent, profit, and wages” (Ricardo, 1951, p. 5).

But very soon in the course of his work Ri-

cardo realized that his analysis could not pro-

teed without a theory of price:

Before my readers can understand the proof I

IllGall tu uffer

)

tht;y must uriclel-3

tancl

tht:

theory of currency and of price . . . If I

could overcome the obstacles in the way of

giving a clear insight into the origin and law of

relative or exchangeable value I should

have

gained half the battle. (Ricardo, 1951; pp.

xiv-v)

Ricardo’s battle was never completely won;

the question of the law of relative prices was to

trouble him to the very end. But it is a measure

of his greatness that the problems he posed have

persisted in one form or another down to the

present.

In order to appreciate the gains made by Ri-

cardo we must carefully follow his line of rea-

soning. The problem he set himself was the

determination of the luws which regulate relative

prices. Now of course he was well aware that

the immediate determinants of market prices

were supply and demand; but over the course of

time the ceaselessly fluctuating interplay of

supply and demand was itself regulated by a

more fundamental principle: equal profitability.

Thus, if as a result of market conditions a partic-

ular sector’s rate of profit rose above the

average rate, then the flow of capital would tend

to be biased towards that sector, causing it to

The laws of international exchange

213

grow more rapidly than demand, and driving duction of the inputs required to produce these

down its market price to a level consistent with inputs, and so on, then the total labor time h, re-

average profitability. Conversely, the sectors quired to produce one unit of commodity A is

with low profitability would tend to grow less the sum of its direct labor requirement 1, and its

rapidly than demand, causing their prices and indirect labor requirements

la(l),

lat2),

. . . etc.

profitability to rise. (Sraffa, 1963, pp. 34-5).

The classical economists were thus able to

demonstrate that behind the continuously

varying constellation of market prices there lay

another set of more fundamental prices, acting

as centers of gravity for market prices and em-

bodying more or less equal rates of profit. The

name given to these regulating prices in classical

political economy was “natural prices,” what

Marx was to later call “prices of production.”

Their discovery was the first great law of prices.

A,, = 1

+ ( 1

+ 1

.) (13.1)

On the other hmd, Sraffa points out that if w

is the uniform wage rate, and

the uniform rate

of profit, the price of production of commodity A

is given by (Sraffa, 1960, p. 35)

j,$,T(

1.)1,(l)

+ (1 +

p1p

+ *

’

(13.2)

All this was well known long before Ricardo’s

time. What then was he searching for? Certainly

not the means by which to calculate the prices of

production. Ricardo exhibits many such calcula-

tions himself, in the process of investigating his

greater problem; so it is clear that a system of

calculation, no matter how elegantly set out in

terms of matrices and vectors, would differ only

in form from the arithmetic relations set out by

Ricardo. What Ricavdo sought to do was some-

thing considerably more meaningful: to get be-

hind prices of production, to discover their

“

r;t;nters

of gravity.

’

That is, just as the market

price of a commodity was shown to be regulated

by its price of production, Ricardo sought to

show that this regulating price was itself subject

to a hidden governor

the total quantity of labor

time required to produce the commodity, both in

its direct production process and, indirectly, in

the production of its means of production.

The preceding equations illustrate the impor-

tance of direct and indirect labor requirements:

their simple sum is the total labor requirement

A~,

and their weighted sum is the price of pro-

duction

pa.

We come now to the critical point in the Ricar-

dian argument. In effect, what Ricardo argued

was that even though both the labor require-

ments and their weights (the wage-profit combi-

nations WJ) enter into the calculation of prices

of production, they are not equally important in

causing changes in these prices.

“In speaking . . . of the exchangeable value

of commodities, or the power of purchasing pos-

sessed by any one commodity, I mean always

that power which . . . is natural price” (Ri-

cardo, 1951, p. 92).

“The great cause of the variation in the rela-

tive value of commodities is the increase or

diminution in the quantity of labour required to

produce them” (Ricardo, 1951, p. 36).

There we have it: the great cause of the varia-

tions in the price of production of a commodity

is the variation in the total labor time that goes,

directly or indirectly, into its production. The

total quantity of labor time was the center of

gravity of the commodity’s price of production,

just as this price was itself the center of gravity

of its market price. This was Ricardo’s attempt

to formulate a second great law of prices.

Let me illustrate the logic behind this. Sraffa

(1960) has shown that if one unit of some com-

modity A requires

worker-hours for its direct

production, 1,(l) for the production of its physical

inputs (machines, raw materials),

1,(2)

for the pro-

Let us first consider changes in the equilib-

rium price weights

1%’

and

First, as Sraffa so

elegantly demonstrates, a rise in the wage rate

is necessarily accompanied by a fall in the rate of

profit

(Sraffa, 1960, pp. 39-40) so far as rela-

tive prices are concerned. Therefore, Ricardo

argued that on the average the opposing move-

ments of these two weights would tend to cancel

each other out (Ricardo, 1951, p. 35-6). Fur-

thermore, it was his belief that in any case the

wage rate, being such a fundamental social

parameter, is only susceptible to relatively small

variations (Ricardo, 1951, p. 36): it is, as Keynes

was later to say, “sticky.” Last, Ricardo was

careful to point out that the net effect of a rise in

the wage rate and a corresponding fall in the rate

of profit varied from commodity to commodity:

whereas, it might raise some prices of produc-

tion, it would lower others, and leave others still

unchanged, so that it would have no determinate

effect on the direction of change of any given

commodity price (Ricardo, 1951, p. 46).

We turn next to the remaining factor

changes in labor requirements. Since any one

commodity is only one of literally hundreds of

thousands, an improvement in its conditions of

production is not likely to have much of an effect

on the general sot al parameters WJ. Any such

improvement will, however, in general reduce

its price bY lowering it s total labor requirement

eithe r it will reduce direct labor costs by low-

ering direct labor requirements 1,; or it will re-

2 14

Anwar Shaikh

duce

costs of physical inputs used up by saving

on their use, thus lowering indirect labor re-

quirements

la(l),

luC2),

. . . , etc.; or it will do

both.

Of course, a lower price for commodity A

might lower costs for other commodities, and

hence their prices too. But it is intuitively plau-

sible that these feedback effects will not in gen-

eral be greater than the original, so that the net

effect

a lowering of the commodity’s price rel-

ative to the average: a reduction in the total

labor requirement A, of a commodity would be

associated with a reduction in its equilibrium

price pa.

In estimating, then, the causes of the varia-

tions in the value of commodities, although it

would be wrong wholly to omit consideration

of the effect produced by a rise or a fall of real

wages, it would be equally incorrect to attach

much importance to it; and consequently, in

the subsequent part of this work, although I

shall occasionally refer to this cause of varia-

tion, I shall consider all the great variations

which take place in the relative price of com-

modities to be produced by the greater or less

quantity of labour which may be required

from time to time to produce them. (Ricardo,

1951, p. 36)

Ricardo is true to his word. In the chapters

that follow he ignores the secondary variations

in prices by simply assuming that relative prices

are more or less equal to relative labor-times.

Both the analysis of money and that of foreign

trade is conducted on this basis.

It should be very clear from the above, inci-

dentally, that Ricardo’s law of prices in no way

depends on the “assumption of a single factor of

production” (Johnson, 1968,

85),

as is so

often asserted. It is hard to believe that anyone

who has ever read Ricardo can make this claim;

even for a mind steeped in the marginalities of

neoclassical thinking it must be difficult to con-

front Ricardo and come away with nonsense like

that. lg

The classical quantity theory of money. Having

analyzed at great length the causes of the varia-

tions in relative prices, Ricardo then proceeds to

the causes of variations in the level of (money)

prices. For reasons outlined previously, we as-

sume (as does Ricardo) that gold is the money

commodity.

The money price of a commodity is of course

its relative price expressed in terms of the

money commodity; that is, its rate of exchange

with gold. Thus, the price of steel is so many

units of gold; normally, when gold is used as

money, there arise special names for specific

weights of it. In England around Ricardo’s time.

for instance, roughly a

l/4

ounce of gold was

known as a pound (f). A quantity of steel ex-

changing for

l/2

of an ounce of gold would

therefore be said to have a “price of

&2.

”

By the Ricardian law of prices, all commodi-

ties exchange roughly in proportion to the total

labor-times required for their production. It

follows, Ricardo notes, that the money prices of

commodities are determined by the quantities of

the labor-times requiwd for their production rel-

ative to the quantity of labor-time required for

the production of gold. Of course, gold cannot

have a money price in this sense, since it is

money. But to Ricardo, the quantity of steel (or

corn, or cloth, etc.) purchased by

(l/4

oz) of

gold could be viewed as a “commodity price” of

gold. He therefore often refers to the “value” of

gold.

Suppose it takes 100 worker-hours to produce

a ton of steel, and that in a given year 4,000

tons are produced. The steel will then require

400,000 worker-hours. If it takes l/2

worker-

hours to produce

(l/4

oz) of gold, then the

money price of the year’s steel output will be

f800,000.

Steel, however, is only one of a whole range

of commodities produced in a given year. During

any one year, therefore, the same gold coin may

change hands several times, being received by

one person through the sale of a commodity and

then being given over to someone else when it is

used to buy another commodity. In this way the

same gold coin can function as money more than

once, in a given year. Let us say that on the

average a coin changes hands five times a year;

its velocity of circulation is then five.

Imagine now that the labor-time required for

all the commodities produced in a given year is

40 million worker-hours. Since we stated pre-

viously that

(l/4

oz.> of gold requires

l/2

worker-hours, the money price of the society’s

yearly output will be

&80

million. Moreover, if

the velocity of circulation of

coins is indeed

five, this means that only 16 million gold coins,

each weighing

(l/4

oz) will be required as

money in that year.

Of course, the laws discussed so far apply

only to prices of production. We know from the

laws of market prices, however, that if a com-

modity’s supply exceeds its demand, then the

market price of the commodity will fall, that is, it

will exchange for less of other commodities. If

this law is also applied to money it leads straight-

away to the proposition that when the quantity

of gold coin exceeds the requirements of circula-

tion (the demand for coin), the “price” of gold

will fall. Now, since gold is money, it cannot

have a money price; however, since it can be

used to Purchase anv commoditv on the market.

it can be said to have literally thousands of

“commodity prices

,’

’

these being the quantities

of the various commodities one can buy with

(l/4 oz) of gold. The quantity theory of money

therefore asserts that when the quantity of gold

cuin exceeds the

requirt=meriCs

of circulalion,

afI

the commodity prices of gold will fall; since this

means that gold

wit1

purchase less of each com-

modity, it is equivalent to asserting that all

money prices will rise.

If we consider England as a closed economy

with gold produced within its borders, then the

reduced price of gold

the higher prices of all

other commodities

would, according to Ri-

cardo’s

theory, result in reduced output from the

goMmines.

This reduction in the supply of gold

would in turn eventually raise its price, so that

once

again gold would exchange against other

cnmmcbditie,s in

pmportinn

th4=%-

respxt~ve

labor- times.

If instead, gold were produced in a foreign

country like South Africa, then to say that the

“price” of gold in England has been lowered is to

say that its purchasing power over commodities

has been reduced. Gold will therefore have dif-

ferent purchasing powers in different countries,

and will flow out of England into countries

where its “price” is higher; once again, the effect

will he to lower the quantity of money in Eng-

land, and hence raise the “price” of gold back

towards its natural level. In this way the interna-

tional Aows of gold would lead to more or less

the same purchasing power of (gold) money in

all countries. This conclusion of the classical

quantity theory of money is known as the doc-

trine of “purchasing power parity” (Johnson,

1968,

92).

The law of internationa1 exchange. The critical

element in Ricardo’s law of comparative cost is

really the quantity theory of money, because it is

through its operation that the law is derived.

However, in order to follow Kicardo’s analysis,

wiU

also use his law of prices.

Let us begin by considering two commodities,

cloth and wine, produced in England; cloth re-

quires 100 worker-hours to produce, and wine

120 worker-hours. If, as in our previous ex-

amples,

(l/4

oz) of

goId

required 3/2

worker-hour to produce, then from Ricardo’s

law of prices the prices of production of cloth

and wine would be more or less equaJ to their

respective labor-times relative to that of gold.

Cloth would sell at about

~5200,

and wine at

about

X240,

domestically.

Consider now the same two commodities in

Portugal. The unit of money in Portugal we take

to be an

VSCU&I

(e.), roughly

116

of an ounce of

gold; assuming the same labor-time for gold in

Table

13.1.

England Portuga2

Cloth: 100 hrs 50 02

gold 45 ozgold 90 hrs

:Cloth

Wine : 120

hrs

60 oz

gold 40

gold 80

h-s :Wine

all countries, one escudo Cl/6 oz) of guld would

then require

l/3

worker-hours to produce. If

then in Portugal cloth took 90 worker-hours, and

wine 80 worker-hours, their domestic prices of

production would be roughly 270 e. and 240 e.,

respectively.

But note that both Z’s and e.‘s are merely dif-

ferent national money-names for quantities of

gold. If England’s payments to foreigners ex-

ceeded its

receipts

from them, that is, if it

Tan

balance of payments deficit, gold bullion would

eventually have to be used to make up the dif-

ference.20 Since both currency units are actually

quantities of gold, and the international means of

payment is in fact gold bullion, we can consider-

ably simplify the exposition by expressing all

prices directly in ounces of gold. Given that an

ounce of gold requires two hours of labor-time,

we have the following Ricardian tableau for Eng-

land and Portrrgal (Table 13.1).

Clearly, in this initial situation Portugal’s

greater efficiency in production translates

directly in an absvllrte adljantctge in trade. If

transportation costs are not prohibitive, Por-

tuguese capitalists will export both commodi-

ties. England will experience a continuing bal-

ance of trade deficit, which will have to be made

up by shipping gold to Portugal.

According to Ricardo, it is at this point that

the quantity theory of money becomes crucial.

The outflow of gold from England is a decrease

in its domestic supply of money,

that ac-

cording to the quantity theory the goid prices of

lrll English commodities will begin to fall. Con-

versely, the inflow of gold to Portugal will raise

alI prices there. As this happens, Portugal’s

competitive edge in international markets will

gradually erode, even though it will of course

have just as great an advantage in terms of effi-

ciency as it did before. It is just that this greater

efficiency will be increasingly offset by the rise

in Portuguese prices relative to those in Eng-

land.

Sooner or later In this process one of the two

English commodities will become just competi-

tive with its Portuguese counterpart. But which

one? Well, in terms of efficiency, England al-

ways has an absolute disadvantage relative to

Portugal in both commodities. But as all English

prices fall and all Portuguese prices rise, the

216 Anwar Shaikh

English commodity with the smnllust disadvan-

tage will be the first to overtake its Portuguese

rival. If we examine the Ricardian tableau,

(Table 13.1) we

fmd

that English wine produc-

tion is only 66 2/3 percent as efficient as its Por-

tuguese rival (since Portuguese wine takes

hours and English wine takes 120 hours),

whereas English cloth production is 90 percent

as ef~cient as Portuguese* England’s smallest

disadvantage

its

~~~~~~~~?~

advantages lies in

cloth, and as English prices drop relative to Por-

tuguese, it is English cloth which first becomes

competitive. By the same token, it is clear that if

England has an equal disadvantage in both

sectors of pr~ductiun then both English eom-

modities would become e~mpetitiv~ at exactly

the same point. Though trade could still take

place under these cireumstances~ there would be

no fixed basis fur specialization* Only if England

has different disadvantages in the two eommodi-

ties, that is, only if it has a relative advantage in

one, can Ricardian trade take place?

Once England can compete in cloth, two-way

trade will begin. This will improve England’s

trade picture, but it will probably not eliminate

the deficit; price level movements will therefore

continue to take place, strengthening England’s

international position and weakening Portugal’s

l~~~t~~

~~~llzy

SOme

poiizt

trude

~~~~~

~~~~~~

/PSS

~~~~~~~,

with each country exporting the

one commodity in which it

HOW

has a relative ad-

vantage. If for some reason the adjustment

process goes too far, to the point where even

English wine undersells Portuguese, then the en-

suing gold flows would reverse the price level

movements until once again relative advantage

reigned.

An important implication of the process of ad-

justment is that in the end each country’s inter-

national terms of trade (the quantity of imports

that can be bought with a unit of its exports) will

necessarily be better than its domestic, In Eng-

land, for example, the cloth on the market will

be English cloth; but the wine available will gen-

erally be imported from Portugal. Those whose

unbounded patriotism would require them to in

sist on English wine will have to pay a higher

price fur it than they would for the imported

variety* Therefore, a unit of cloth, England’s ex-

port commodity will be worth more units of

Po~uguese wine than it will be

domestic wine

simply because domestic wine costs more. Simi-

larly, in P~~ugal, its export, wine, is worth more

units of English cloth than it is of Portuguese

cloth simply because the English cloth is

GhtXpX.

The proposition just forwarded, on the terms

of trade of each country has often been used as

the basis of a proof that each nation-as-,a-whole

gains from trade. Thus it is said that England can

get more wine for its cloth through trade than it

can get domestically: trade is generally benefi-

cial. Though Rieardo is careful to derive the

laws of trade on the basis of its profitability to

capitalists, when he turns to the analysis of the

effects of trade he abandons the concept

classes and reverts to that of a

natiun-as-~-

whole. Now, it is undeniable that the concept of

a nation is both valid and necessary at some

level of analysis; nations do exist and their in-

teraction is a real process. But to assert that

trade is beneficial to the nation-as-a-whole is

simply to assert that ‘“what’s good for General

Motors is good for the US.” Trade is under-

taken by capitalists because they can make more

profits that way; it is they who always gain.

Even if this gain for the capitalists happens to

spill over to workers in either country, which is

certainly not necessary from the above analysis,

one can only say that in this instance trade also

benefits a particular set of workers. It is not pos-

sible to reduce the fundamentally antagonistic

relations of classes to the bland homogeneity of

a nation-as-a-wholes Christians are not in a posi-

tion to cheer for lions as long as they are both

booked to play in the Coliseum.

Moans

~e~ivat~~~~

of the law, It should be ubvi-

ous from the preceding derivation how crucial

the “right” sort of monetary theory is to the

derivation of the law of comparative costs. Any

monetary theory which translates the initial

trade deficit of the backward country into falling

price levels (falling relative to the price level in

the advanced

cou~t~~~

will do the trick. We need

therefore to say a bit about the modem deriva-

tions of this law.

Let us begin with a modern version of the

quantity theory, based on the cash balance ap-

proach. The classical quantity theory argued

that an outflow of gold from a country would

lead to a fall in the money supply and hence in

the price level. Here, it is argued that the de-

crease in the money supply implies a decrease in

the cash balances of individuals and firms;

order to “not let their cash balances shrink too

far,” people in the deficit country curtail their

consumption and investment spending, and this

drop in aggregate demand in turn leads to lower

prices and wages (Yeager, 1966,

64). The op-

posite movement takes place in the surplus

country, and eventually absolute advantage

gives way to comparative.

An alternate path to this same result is made

possible by tying the price level to the level of

money wages. In this version, since the competi-

tion of cheap cloth and wine from abroad means

a reduction in dumestic wine and cloth produc-

The laws of international exchange 217

tion in the backward country, the resulting trade

deficit will be associated with a rise in un-

employment. Money wages in the backward

country will consequently fall, and with them

money prices; in the advanced country, the

trade surplus is associated with expanded em-

ployment, a rise in money wages, and hence a

rise in money prices. Even if money wages were

relatively sticky downwards, the above result

would hold since all that is required is a move-

ment in one of the two price levels so as to arrive

at the correct relative price levels. Once again,

this leads to the eventual rule of comparative ad-

vantage (Amin, 1974, p. 47).

All discussions so far have been predicated in

terms of the gold standard, in which the “ulti-

mate” basis of international currency is a money

commodity (which we call gold for conve-

nience). In most theoretical discussions, the

gold standard is treated as being equivalent to a

regime of fixed exchange rates. The preceding

modern derivations of comparative advantage

are therefore also presented as holding true for

the case of fixed exchange rates.

At the opposite theoretical extreme from fixed

exchange rates, we are told, lies the notion of

purely flexible exchange rates determined solely

by the relative supplies and demands of the na-

tional currencies. Here it is possible that each

nation will have a fully independent monetary

system (Yeager, 1966, p. 104). In this case, the

price levels in each country are “insulated”

from external influences, and all adjustments are

brought about through the exchange rate. In the

backward country the trade deficit will imply a

depreciation of the country’s currency, which

would make imports relatively more expensive

to it and its exports relatively cheaper abroad.

Since this process is assumed to have no limits,

eventually the flexible exchange rate would

settle at the level which made comparative ad-

vantage a reality.

We cannot consider the merits of these

various derivations until we have examined

Marx’s theory of money. But it is useful to note

even at this point that it is completely false to

equate the notion of the gold standard with fixed

exchange rates. As indicated at the end of this

chapter, note 20, in actual fact the gold standard

was a system of flexible exchange rates whose

movements were hounded by limits determined

by the costs of transporting gold. This meant

that insofar as the “normal” variations of trade

were concerned, the gold standard operated as if

it wcrc a system of purely flcxiblc cxchangc

rates. On the other hand, insofar as systematic

imbalances were concerned, the exchange rate

soon reached one of the two limits and it became

cheaper to settle debts by shipping gold directly:

in this mode, therefore, it operated like a system

of fixed exchange rates. The theoretical notion

of the two polar extremes of fixed versus flexible

exchange rates thus have their origin in one-

sided (and hence false) abstractions of the real

process. We will return to this important point

later on.

Marx’s development

exchange of the laws of capitalist

As the preceding discussion of Ricardo should

have made clear, it is the interaction of the Ri-

cardian theory of price with his theory of money

which results in the law of comparative costs.

Now, as we turn to Marx, we face the task of

trying to present, in a few short pages, the es-

sence of Marx’s theories of price and money so

that we may see what implications they in turn

have for international exchange. Here, the over-

riding question is whether the international ex-

tension of Marx’s law of value will indeed turn

out to be the law of comparative costs (as has

been generally assumed), or whether it will in

fact turn out to be something quite different.

Marx’s law of value has, of course, many

points of comparison with Ricardo’s analysis;

often, through an emphasis on these common

points, the impression is given that Marx was

therefore a (major or minor) post-Ricardian clas-

sical economist. Such an impression is, how-

ever: completely misleading and can arise only

through the

redtiction

of Marx’s analysis to only

those points which overlap with Ricardo’s. As

long as one begins with Ricardo as the home

base, all such comparisons are inevitably posed

in Ricardian terms; Marx thus emerges as the

cleverest Ricardian of them all.

Within the context of this brief exposition, it is

hardly possible to do justice to even the notions

of value and price in Marx, much less to the

methodological break between Marx and the

classical economists. Of necessity, many of the

points we seek to cover are precisely points of

comparison with Ricardo; nonetheless, the

reader must be forewarned that the differences

which do emerge are not merely variations on a

Ricardian theme. On the contrary, it is exactly

because Marx does not operate within a Ricar-

dian framework that he is able to go beyond Ri-

cardo’s own

analysis.22

Commodities. In the discussion of Ricardo’s law

prices,

the fundamental question seemed

fairly well defined: what are the laws of the

movements of prices of production?

What Ricardo perceives is that the “worth,”

the “exchangeable value,” or commodities

218 Anwar Shaikh

bears an intrinsic connection to labor-time

(Marx, 1969, pp. 164-7). This, says Marx, is Ri-

cardo’s greatest scientific merit (Marx, 1969,

p. 166). But at the same time, rather than devel-

oping the various intermediary links between

labor-time and price, Ricardo attempts instead

to fuse the two together in his law of prices. His

failure to adequately distinguish between labor-

time and price is, according to Marx. the first

great source of error in his analysis (Marx, 1969,

Ch. X; pp. 106, 164, 174-6).

In addition to that, however, there is another

problem. How can Ricardo attempt to analyze

the effects of a uniform rate of profit on prices,

asks Marx, when he nowhere discusses what de-

termines the level of this rate of profit? And this

in turn leads to an even more basic question. A

uniform rate of profit is simply a way of saying

that profits on different capitals are proportional

to the size of these capitals: that is, each capital

gets a share of total profit in proportion to its

own size. But Ricardo nowhere discusses what

determines the total profit in the first place. How

then can he attempt to isolate the factors which

regulate the movements of prices of production

when he is missing a crucial ingredient

profit?

It is apparent to Marx that before one can ar-

rive at the laws which govern price, one must

first answer two prior questinns: first, what is

meant by price and how does it arise? And sec-

ond, what is meant by profit, and how does it

arise?

Since the concept of price refers to the ex-

change of commodities, Marx begins by exam-

ining what a commodity is. In all societies, he

notes, human beings produce useful objects. It is

only in a particular type of society, however,

that the useful products of human labor are in-

tended not for some direct social use but for ex-

change. And precisely because exchange is a so-

cial process which quantitatively compares and

equates different products, in societies which

produce for exchange the products of human

labor acquire the property of having quantitative

worth. No longer are they merely useful; they

also valuable: they are commodities. As

Marx expresses it, a commodity is both a use-

value and an exchange value.

But when we say that a commodity is worth

something, just what is implied? Suppose I say

that in barter, a bushel of corn is worth a ton of

iron, and also a yard of silk, and an ounce of

gold, and so on. At first glance, what I appear to

be saying is that there are many different quanti-

tative expressions for the worth of a bushel of

corn, depending on which other commodity

(iron, silk, or gold) I choose to meusure it by.

But there is a deeper problem here. In order

for me to measure the worth of corn in terms of

gold, for instance, gold must also be worth

something itself. Otherwise I cannot say how

much gold is equivalent to a bushel of corn. It is

just like my saying that a stone weighs 10 grams;

what I mean is that on a scale it takes ten pieces

of iron called gram-weights to equal the weight

of the stone. But clearly, in order for me to carry

out this operation, both stone and iron must

already possess the property of being heavy, of

having weight; the gram-weights don’t make

stones heavy, they only measure the already ex-

isting heaviness of stones.

Exactly the same conclusion applies to quanti-

tative worth. The factors which cause conlmodi-

ties to have quantitative worth in the first place

must be carefully distinguished from the mea-

surement of this worth. Measuring the worth of

corn in iron will give a different result from mea-

suring it in gold; but neither measure causes

corn to possess quantitative worth. Rather, each

merely expresses the preexisting worth of corn

in terms of some particular commodity.

The question of price is therefore really a

two-fold one: first, what is the cause of quantita-

tive worth; and second, how is this worth actu-

ally expressed, measured, in exchange?

Value. If we look at society as a regularly repro-

duced set of social relations, it becomes very

clear that the production and reproduction of the

masses of useful objects which correspond to

various social needs requires a definite, quanti-

tative distribution of social labor. Each different

useful product requires a concretely different

type of labor; reproduction of the material basis

tlit:

suc;itAy

cvr~sequ~r~lly

r-txpirt;s

tlit:

ksl-

ence and reproduction of the appropriate quan-

tities of different concrete labors. That is to say,

social labor from the point of view of its capacity

to produce different use-values is what Marx

calls social-labor in its role as concrete labor

(Marx, 1967, Vol. I, p. 46).

We noted earlier, however, that in commod-

ity-producing societies each product, in addi-

tion to being useful, acquires the further prop-

erty of being valuable. Hence, labor which

produces commodities (i.e., objects intended for

exchange) itself acquires a new property:

namely, the capacity to create value or quantita-

tive worth. In this role, moreover, all com-

modity-producing labor is qualitatively alike,

since different types of labor differ only in

their resulting amounts of value. The very same

social conditions which make varied useful ob-

jects quantitatively comparable by reducing

them to a common denominator, also make the

corresponding labors quantitatively comparable.

In the case of the useful objects, their common

denominator is auantitative worth: in the case of

The laws of international exchange

219

the labors, it is the capacity to result in quantita-

tive worth. From the point of view of this latter

property social labor is qualitatively alike and

quantitatively comparable: it is what Marx calls

social labor in its capacity as abstract labor. Ab-

stract labor, that is, labor which is actually

engaged in commodity production, is the cause

of quantitative worth.

The total quantity of

ab-

slracl

labor

r-cquirt;d

dil-ectly

or indirectly for the

production of a commodity Marx therefore calls

the intrinsic measure of its quantitative worth,

or its value.

The value of a commodity, the intrinsic mea-

sure of its exchange-value or worth, is the quan-

tity of abstract labor-time necessary for the pro-

duction of the commodity under average condi-

tions. If looms, for instance, are made in one

year by hand, and in a given year 100 looms are

produced, SO by

t;ffic;it;n

t p-oducers

rr=quiring

900 worker-hours per loom and 50 by inefficient

producers requiring 1,100 worker-hours per

loom, then the value of a loom in that year is

1,000 worker-hours. It is the average quantity of

labor-time necessary, not as in Ricardo, the

marginal, which counts here (Marx, 1967, Vol. I,

p. 39).

Suppose the production of a bolt of cloth took

10 workers ten hours a day for one week (six

days) to gather cotton seed, plant it, harvest

tilt:

cotton, and with the aid of a loom, spin the

cotton into cloth. Then the value of the cloth has

two components: the living labor of the cloth

worker, 600 worker-hours, which represents the

value added in cloth production during one

week; and that part of the value of the loom

which is transferred to the cloth. But how is the

latter to be determined? Well, if the loom was

used up in one week then it is clear that all the

value of the loom would be incorporated into the

cloth, since from a social point of view the

labor-time required to build the loom is the indi-

rect social cost of producing cloth. If the loom

lasted longer, say one year (50 weeks), then over

one year it will be entirely used up and all of its

value transferred to the

bolts of cloth pro-

duced in that period of time. On the average,

therefore, the loom would transfer

l/50

of its

value each year to a bolt of cloth. Because the

second case is basically the same as the first, we

will simplify the exposition from now on by

assuming a uniform period of turnover of one

week. Then the value of the cloth is 1,600

worker-hours: 1,000 of these trawferred by the

loom as it is used up, 600 added by living labor.

If we designate the total value of any output

produced in a given week as W, the value trans-

ferred by its means of production as C, and the

value added by living labor as L, then:

C+L=W

(13.3)

We turn now to the second aspect of price:

how is quantitative worth actually expressed in

exchange? To this Marx answers: in exchange,

the quantitative worth of a commodity

must

nec-

essarily take the form of money-price. Since ex-

change is the interchange of two commodities, at

first glance it seems obvious that there are as

many measures of a commodity’s worth as there

are other commodities to measure it by. And his-

torically, where exchange is sporadic or irregu-

lar, this is in fact true. But as exchange spreads

and develops, this variety of different possible

measures increasingly becomes a barrier to the

smooth functioning of the process; without a

point of reference, the direct comparison of

every commodity with every other becomes

impossibly complex. Consequently it becomes

increasingly necessary to settle on a given com-

modity out of all those available as the one com-

modity in which all other commodities express

their worth; this special commodity therefore

becomes the universal equivalent, the money-

commodity. We will henceforth assume it is

gold.

Notice that money does not by itself cause

commodities to have worth, any more than

gram-weights cause stones to have weight. On

the contrary, it is only because both gold and the

other commodities have

quantitative

worth

(exchange-value) in the first place that we can

express their worth in terms of gold. The

money-price of a commodity is the “golden” re-

flection, the external measure, of its exchange-

value. It is what Marx calls the

$5~~2

taken by

value during exchange (Marx, 1967, Vol. I, pp.

47-8).

Price. We have already seen that value, the in-

trinsic measure of exchange-value or quantita-

tive worth, and price, the external measure, are

two very different things. Money-price is the

manner in which the exchange process reflects

value. This in itself implies that all the relations

which intervene between the production of a

commodity and its actual sale can give rise to

further determinants of the precise form in

which this reflection will take place. For in-

stance, in general the market price of a commod-

ity is an expression not only of the amount of ab-

stract labor-time required for its production (its

value) but also of the distribution of social labor

that is, of the correspondence between the

amount of social labor devoted to the production

of a given commodity and the amount necessary

to supply the social need for this commodity.

at any moment this latter correspondence does

not hold, it will show up in the process of ex-

change as a discrepancy between supply and de-

mand;

,hen

even if on the average exchange i

s at

220 Anwar Shaikh

value it will not be so in this case. Market price

will deviate from natural price.

Marx himself points out this and other pos-

sible discrepancies between value and price

(Marx, 1972, pp. 61-2). But he notes, the only

way in which we can proceed to actually deter-

mine any quantitative differences between value

and price is to first proceed on the assumption

that price directly reflects value

that is, that

supply and demand are balanced (so that market

prices equal regulating prices, or natural prices)

and that the money-price of a commodity is its

value relative to the value of gold. In this way

we can identify the structural determinants of

the various steps in the movement from produc-

tion to exchange, and hence of the transition

from value to price. Only then can we show how

these structural determinants can in turn give

rise to more complex paths from value to price

(Marx, 1967, Vol. I, p. 166, footnote

1).24

Surplus-value and profit. We come now to the

second major criticism that Marx levels against

Ricardo: his inadequate treatment of profit.

Let us begin by recalling that it takes 1,000

worker-hours of abstract labor-time to produce a

loom by hand, and 600 additional worker-hours

to use this loom in producing cloth: C = 1,000,

L = 600, W =

1,600.

1000C

600L

1600W

= value of cloth (13.4)

But from the point of view of the capitalist,

the matter looks very different. To him, the

process starts with an investment of money M

and ends with the sale of the loom for. another

sum of money M’. The difference between the

two, AM =

M, is that all important sum,

profit. How does this have anything to do with

labor-time, he asks?

Well, since exchange is in proportion to val-

ues, if the value of an ounce of gold is two

worker-hours, then the money-price of the cloth

must be 800 oz of gold. That gives us the end of

the circuit of capital:

M' = 800 oz

of gold.

What about the beginning? From the point of

view of the capitalists, the initial investment M

goes to buy the inputs of the process. One part

which I will call

MC,

goes therefore to buy

a loom; since the value of a loom is 1,000

worker-hours, its price is 500 oz:

MC = 500 oz

of gold.

The other input is, of course, labor. But what

does it cost? Living labor, we have seen,

transfers the value of the loom to the value of the

product (cloth), and adds 600 worker-hours of

value in the process. If exchange is at values,

then the value-added by living labor is equiva-

lent to 300 oz of gold-money. Clearly, if the

labor input cost as much as 300 oz, then the cap-

italist’s cost would be equal to his price: there

would be no profit! For capitalist production to

be profitable, workers must accept as wages the

money equivalent of a value less than that

which they themselves add to the product. But

then, it would seem, exchange is no longer at

values !

This paradox was in fact a major source of

problems in classical political economy, and

Marx considered the solution to it one of his

great triumphs.

The way out, Marx shows,

lies in the distinction between labor-time and

labor-power. What workers sell in the market is

their capacity-for-labor, not their labor time.

The capitalist pays them a wage in return for the

right to set them to work each day; but how long

they work and how hard, how many hours of

average labor-time the capitalist actually gets

out of them, will depend on the struggle between

capital and labor. Quite apart from the wage rate,

the intensity of labor and the length of the work-

ing day have always been important battle

grounds in the class struggle. The capacity-to-

labor, what Marx calls labor-power, is therefore

very different from labor-time: it is the sum of

the mental and physical capabilities which a

worker can put to use in production, and as

such, its production and reproduction implies

that workers must receive as wages enough

money to buy their means of subsistence: food,

shelter, education, and training

in short, what-

ever is necessary to reproduce themselves as

workers. The value of labor-power, the social

labor-time required for the reproduction of

workers’ capabilities, is therefore the value of

their means of subsistence.

The paradox is now resolved. Workers enter

production as inputs having a specific value;

they leave production having added a quantity of

value to the product through their labor-time.

From the point of view of capitalist society,

therefore, profit can only arise if the abstract

labor-time socially necessary to sustain workers

(the value of their labor-power) is less than the

labor-time that they actually put in (the value

they add to production); in other words, if

workers produce surplus-value. Profit is the

money equivalent, the money form of appear-

ance of surplus-value. In the case of cloth pro-

duction, the value added by 10 workers in a

week is 600 worker-hours; if the value of their

labor-power was 400 worker-hours, the sur-

plus-value would be 200 worker-hours. Wages

would be 200 oz of gold so that profit AM =

M = 800

(500 + 200) = 100 oz: profit

is the money equivalent of surplus-value.

We can summarize all this diagramatically.

Let V stand for the value of labor-power, and

for its money equivalent (the monev-capital

ex-

The laws of internationnl exchnnge

(CW)

. . . .

PRODUCTION

en..

(Cd)

pended

on wages). Since L is the value added by

living labor, L

V =

is the surplus-value pro-

duced

workers. In Figure 13.1, the circuit

begins with a money investment A4 =

Mv,

with which the capitalist purchases means

of production (a loom) having value C, and hires

labor-power (10 workers) having value V; what

‘emerges from the process of production is a

product having value C +

which then sells

for its money-equivalent

A4’.

The surplus-value

is thus reflected in its money-equivalent, the

profit AM.

Prices of production. We have up to now as-

sumed exchange in proportion to values, so that

we may isolate the intrinsic determinants of

price and profit. This is how Marx begins; but

then he immediately goes on to point out that in

general prices proportional to values would im-

ply different rates of profit in different sectors.

Figure 13.1 illustrates the problem. If all

money prices are proportional to values, then in

every sector the money investment 44 will be

proportional to the value cost C + V, and

noney profits M will be proportional to

surplus-value S. It follows from this that the

money rate of profit (AM/M) in each sector will

be equal to the corresponding value rate of

profit:

(AM/M) =

S/(C

V) =

(13.5)

The expression for the value rate of profit ob-

viously depends on the two ratios S/V and C/V.

We therefore need to

Jo,ok

at these

little more

closely.

Recall that surplus-value S is the excess of the

value added (L) by living labor over the value of

its labor-power. Now, if the wage rate is the

same for each worker (assuming that all labor is

of the same skill level

the issue of skill dif-

ferences is outside of the scope of this chapter),

then the value of labor-power is the same for

each; if in any given period each worker puts in

the same amount of labor-time as any other,

then

each adds the same value to the product.

Consequently, each worker produces the same

amount of surplus-value. It follows therefore

that in every sector the proportions of

S: V

will be the same, though the respective size of

221

each will vary with the number of workers em-

ploy ed.

This has two immediate consequences for the

issue of profitability. First of all, the ratio S/V,

the rate

oj’

surp/~s-value, will be the same in

every sector. Second, since the proportion of

: V is the same in every sector, the ratio C/V,

the organic composition of capital, will in each

sector be proportional to the ratio

C/L.

whether or not C/V is, like S/V, the same in

each sector will depend on whether or not C/L is

the same.

The ratio

CfL

however, is in general not likely

to be uniform across sectors. It is the ratio of the

labor-time embodied in the means of production

to the living labor-time required to transform

these into the product; as such it reflects the

technical conditions of production in each

sector, and unless they are generally similar, it

will vary from sector to sector. This in turn

means that although the rate of surplus-value,

S/V, is iniform across sectors, in general the

organic composition,

C/17,

is not. From the cx-

pression for the rate of profit in equation 13.5

we can see that sectors with a high organic com-

position will have a low rate of profit, and vice

versa. It is an inescapable implication therefore,

that prices which are proportional to values will

in general embody unequal rates of profit.

When prices are proportional to values, profit

in any given sector is directly determined by the

surplus-value produced in that sector alone; but

then, as we have seen, rates of profit will differ

from sector to sector. It follows therefore that if

rates of profit are to be equalized, if high and low

rates of profit are to be made equal to the social

average, some sectors must get less profit, and

others more, than that indicated by their respec-

tive surplus-values. This can only come about if

prices of production deviate from direct prices in

a systematic way so as to redistribute the total

pool of surplus-value: in other words, in order

that the equal rates of surplus-value in various

sectors be realized in exchange as equal rates of

money profit, the sale of products must actually

take place at prices which differ systematically

from direct prices.

Clearly, what is involved here is

aschange,

transformation, in the form-ofivalue (money

price). But such a transformation can in no way

alter the total sum of values or the total pool of

surplus-value; the same products as before are

circulated, only now at different prices which

therefore entail a dBerent sharing out of the

pool of surplus value.

Marx deals with the transformation in the

form-of-value in a simple and powerful way. Ba-

sically, he points out that when exchange is

ruled

direct prices, sectors with hinher than

222

Anwar

Shaikh

average organic compositions C/V will have

lower than average rates of profit, and vice versa

(look at equation 13.5 to see why); from this

Marx concludes that in order for each sector’s

profit rate to be equal to the social average,

sectors with high organic compositions must

therefore sell their products at prices above their

respective direct prices, while sectors with low

organic compositions must sell at prices below

thei

r-espective

direct

prices.

What takes place

in the transformation from direct prices to prices

of production is a kind of rotation of prices, with

the average price as the (unchanged) center of

rotation. The total sum of prices is unaltered, as

is total profit; they remain directly proportional

to the total sum of values and the total

surplus-value respectively. Hence the average

rate is simply equal to the value rate of profit, as

in equation 13.5.

In his exposition, and in several other

places,

Marx notes the existence of what I call a feed-

back effect of the transformation just men-

tioned: since individual prices of production

differ from direct prices, this also means that

individual money investments, M, will in general

differ from the corresponding value costs C + V

(Marx, 1967, Vol. III, pp. 161, 164-5). Such a

feedback effect could make the relation between

value magnitudes and their price forms more

complex, Marx observes. But then he leaves this

issue aside, clearly because he considers it to be

of relatively minor importance in the process of

deriving price from value and profit from

surplus-value.

Marx’s opponents immediately seized upon

the incomplete nature of Marx’s transformation,

and, ever since then, this issue has been the

focus of a long-running debate. Recently this de-

bate has flared up once again, leading to some

important new results which support the essen-

tial nature of Marx’s derivations. It is entirely

beyond the scope of this chapter to go into this

matter in any depth; however, in a separate

paper (Shaikh, 1977) I do treat this connection in

detail. For our purposes here, three of its as-

pects are significant. First, that the procedure by

which Marx transforms direct prices can be also

viewed as the initial step in an iterative proce-

dure for

~crlculntin~

the actual prices of produc-

tion themselves. This helps establish a fruitful

mathematical connection between Marx’s pro-

cedure and further-developed prices of produc-

tion. Second, it can be shown (in the case of

three departments of production, at least) that

for each sector both the actual and the regulating

price of production deviate in the same direction

from the sector’s direct price, so too will be the

actual price of production. (Seton, 1957, pp.

157-60) Last, it has been established that the

transformed money rate of profit is directly re-

lated to the value rate of profit, though they

need not be equal in

magnitude.26

For most analyses, knowledge of the above

connections is generally sufficient. In this chap-

ter, therefore, I have used only direct prices

and Marx’s derivation of prices of production,

on the implicit understanding of the connection

between the latter and their further-developed

form.

The theory of money. We began the analysis of

price by noting that a commodity is a product of

human labor which is not just useful but also

valuable. This led us to examine the duality

implicit in the notion of quantitative worth,

which in turn led to the sharp distinction

between value, the intrinsic cause of quantita-

tive worth, and money-price, the measure or ex-

pression of this worth in terms of some universal

equivalent (gold). In order for commodities to be

equal in worth to some quantity of gold, that is,

in order for them to have money-prices, they

must already have worth: money does not cause

worth, it only measures it.

It is a necessary consequence that the factors

which determine how valuable a commodity will

be in exchange, determine its money-price. And

these factors, as we have seen, are the amount

and distribution of social labor-time

If the distribution of social labor is such that

the commodities produced correspond to the

various social needs, supply will equal demand,

and the money-price of a commodity will equal

its regulating price

direct prices if we assume

exchange in proportion to values

prices of pro-

duction at a higher level of analysis. In

either-

case, it is the amounts of labor-time which deter-

mine these regulating prices.

If, on the other hand, the distribution of labor

is not appropriate to various social needs, then

the market price of a commodity will deviate

from its regulating price, and a change will take

place in the distribution of social labor so as to

reduce the discrepancy between market and

regulating prices. For the purposes of this analy-

sis, therefore, we may leave out of consider-atiun

the constantly fluctuating market prices and

focus directly on regulating prices.

In any given year, the sum of prices of all the

commodities produced must equal the number

of coins in circulation times the velocity of circu-

lation. This, as Marx points out, is simply a

tuu-

tology.

In order to make it something more, we

must embed it in a theoretical structure.

Let us begin by assuming that the regulating

prices are direct prices. Then the price of any

commodity is its value relative to that of gold, so

that the sum of the prices of all the commodities

The laws of international exchange

223

produced in a given year is given by their total

value relative to the value of gold. Let TP stand

for the sum of prices, TW for the sum of values,

and U, for the value of a

mnit

(an ounce) of gold,

we can write

TP = (TW/o,)

(13.6)

In this equation, the sum of (regulating) prices

is the direct expression of the sum of values of

commodities. If the velocity of circulation is

then the amount of gold, G (in the form of one-

ounce coins), which is required as a medium of

circulation is

G = TP/k = [(l/k)(TW/o,)]

(13.7)

The causation in this is very clear: the sum of

the values of the commodities produced in a

given period determines the sum of their money-

prices, and this in conjunction with the velocity

of circulation

,27

determines the number of (1 oz)

gold coins required for the circulation of the

commodities (Marx, 1967, Vol. I, p. 123, et

passim).

Though the preceding relations were derived

on the basis of direct prices, they are not the

least bit altered when we move on to prices of

production, for, as we have seen, the regulating

prices of production that Marx derives have the

same sum of prices as do direct prices. This

means that as far as the sum of the prices of all

commodities is concerned, the determination is

the same whether we assume direct prices or.

prices of production: the sum of prices equals

the sum of values divided by the value of an

ounce of gold. As a result, the quantity of gold

required is the same in either case.

What happens then if there exist more gold

coins than the required number? Well, the quan-

tity G is the number of gold coins which cir-

culate because they facilitate the circulation of

commodities. Therefore any quantity of coin

over and above this amount will be redundant in

circulation: it will at first take the form of idle

coin, excess coin (Marx, 1972, Ch. 2, Sec.

3a).28

But an excess supply of gold is a very different

thing from an excess supply of any other com-

modity. All other commodities, in order to fulfill

their function, must be sold, turned into gold

through the alchemy of exchange; but gold itself

does not have to be, in fact cannot be, sold. It is

money,

the perfect and durable form of wealth

which all other commodities seek to obtain.

From the earliest stages of commodity produc-

tion, therefore, gold circulating in the form of

coin has existed side by side with noncirculating

gold in the form of reserve coin, in the form of

hoards, and in the form of luxury articles.

The very nature of commodity production, the

unceasing fluctuations of market prices and

quantities, requires that every commodity

owner have on hand a reserve of money to

accommodate day to day variations. Conse-

quently, the first manifestation of a persistent

excess of coin over the needs of circulation will

be the buildup of these reserves above the requi-

site levels; but then this superfluous gold, being

necessary neither for immediate circulation nor

for its anticipated variations, will be withdrawn

altogether from the vicinity of the sphere of ex-

change. It will either enter into hoards or it is

transformed into articles of luxury:

We have seen how, along with the continual

fluctuations in the extent and rapidity of the

circulation of commodities and in their prices,

the quantity of money current unceasingly

ebbs and flows. This mass must, therefore, be

capable of expansion and contraction. At one

time money must be attracted in order to act

as circulatmg coin, at another, circulating coin

must be repelled in order to act again as more

or less stagnant money. In order that the mass

of money, actually current, may constantly

saturate the absorbing power of the circula-

tion, it is necessary that the quantity of gold

and silver in a country be greater than the

quantity required to function as coin. This

condition is fulfilled by money taking the form

of hoards. (Marx, 1967, Vol. I, p. 134)

In countries where commodity production is

still primitive, hoards take the form of private

accumulations of gold scattered throughout the

country. But as commodity production, and

hence the banking system, develops and ex-

pands, hoards become concentrated in the res-

ervoirs of banks (Marx, 1972,

pp.

136-7). Under

these circumstances, excesses or deficiencies of

gold money relative to the needs of circulation

manifest themselves as increases or decreases of

bank reserves.3o

Hoards in the form of bank reserves, how-

ever, are very different from private hoards: to

the bank, an excess of bank reserves over the

legally required minimum is a supply of idle

bank-capital, money-capital which could be

earning profit for the bank but is instead lying

fallow. An increase in bank reserves is therefore

generally accompanied by a decrease in the rate

of interest as the banks strive to convert re-

serves into capital. Conversely, a drop in bank

reserves below the legal minimum tends to lead

to a rise in the rate of interest. Rather than

raising the price level, the immediate effect of an

excess of gold-money is to lower the rate of

interest: “If this export [of capital] is made in

the form of precious metal, it will exert a direct

Influence upon the money-market and with it

upon the interest rate . . .” (Marx, 1967, Vol.

TIT,

p. 577).

224 Anwar Shaikh

But now it might be asked: surely the fact that

the bank puts this extra money into circulation

via a lowering of the rate of interest also implies

that effective demand is thereby raised? And if

so, won’t this in turn imply that as a conse-

quence of this higher effective demand prices

will eventually rise

so that in the end the quan-

tity theory is right after all? Marx’s answer is

unequivocal: no.

We begin by noting that

increased supply

of gold can indeed lead to an increase in effec-

tive demand, either insofar as it is spent by its

original owners, or indirectly because it will ex-

pand bank reserves and hence the supply of

loanable money-capital, which will tend to drive

down interest rates, which may in turn increase

capitalist borrowing for investment.31 However,

even though this increase in effective demand

may temporarily increase prices of some com-

modities, and hence raise profits in some

sectors, it must eventually lead to an expansion

of production to meet the new demand. And as

production expands prices will fall until (all

other things being equal) they regain their origi-

nal levels. In this case the sum of prices of all

commodities will have increased, not because

the level of prices has increased, but because the

mass of commodities thrown into production has

itself increased. Thus, insofar as a pure increase

in the supply of gold

does

generate

increase in

effective demand (i.e., insofar as it does not sim-

ply expand bank reserves or go into the produc-

tion of luxury articles) it will also generate an in-

creased need for circulating gold coin.

It is important to note at this point that to

Marx, the notion of a capitalism that tends to be

more or less at full employment is a vulgar fan-

tasy. First of all, Marx notes that it is an inherent

tendency of capitalism to create and maintain a

relative surplus population of workers

the re-

serve army of the unemployed (Marx, 1967, Vol.

I, Ch. 25). Second, even with a given pattern of

fixed capital (plant and equipment), expansion of

production can easily be undertaken by ex-

tending and/or intensifying the working time in a

given working day (Marx, 1967, Vol. II, p. 258).

Last, it is an intrinsic requirement of

capilalisl

commodity production, which is regulated only

by the constant fluctuations of the circulation

process, to maintain stocks of various commodi-

ties so that the exigencies of circulation may be

met without disrupting the continuity of the pro-

duction process. It is precisely because of these

possibilities that the continuity of the production

process is possible alongside constantly varying

levels of production and sale. (Marx, 1973, pp.

X52-6)

It is extremely important to grasp this aspect

of circulating and fixated capital as speci$c

characteris tic forms of capital generally, since

a great many phenomena of the bourgeois

economy

the period of the economic

cycle, . . . the effect of new demand; even

the effect of new gold-and-silver producing

countries on general production

[would

otherwise] be incomprehensible. It is futile to

speak of the stimulus given by Australian gold

or a newly discovered market . . .

[ifi

were not in the nature of capital to be never

completely occupied . . . At the same time,

[note] the senseless contradictions into which

the economists stray

even Ricardo

when

they presuppose that capital is always fully

occupied . . .(Marx, 1973, p. 623)

Having located Marx’s criticism of Ricardo’s

theory of money,32 we can now turn to its impli-

cations for gold flows generated by changes in

the balance of international trade. In the case of

a surplus, for instance, there will be a net inflow

of gold into the country and a consequent in-

crease in the country’s supply of gold. Insofar as

this leads to an increase in effective demand,

production will expand, and with it the needs of

circulation. Part of the increased gold supply

will therefore go to meet the expanded require-

ments of circulation, part will pile up in bank re-

serves, and part will be absorbed in the ex-

panded production of luxury articles made of

gold. In addition, once we take international

trade into account, a part of the surplus gold

may be re-exported in the form of foreign loans

in search of interest rates, or as foreign invest-

ment in search of surplus-value. These last two

possibilities, as we shall see shortly, become im-

portant in a Marxian analysis of international ex-

hirgt;

In any case, Marx emphatically rejects the no-

tion that a “pure” increase in the supply of gold

will in general lead to an increase in prices:

It is indeed an old humbug that changes in the

existing quantity of gold in a particular

country must raise or lower commodity-prices

within this country by increasing or de-

creasing the quantity of the medium of circula-

tion. If gold is exported, then, according to the

Currency Theory, commodity-prices must

rise in the country importing this gold, and de-

crease in the country exporting it . . . But,

in fact, a decrease in the quantity of gold

raises only the interest rate, whereas an in-

crease in the quantity of gold lowers the inter-

est rate; and if not for the fact that the fluctua-

tions in the interest rate enter into the determi-

nation of cost-prices, or in the determination

of demand and supply, commodity-prices

would be wholly

unakctd

by t&m (Marx,

Capital, 1967, Vol. III, Ch. XXXIV, p. 551)

It should be noted at this point that Marx’s

The laws of international exchange

theory of money implies not only a rejection of

the Hume specie-flow mechanism on which Ri-

cardo’s

results were based, but also rejection of

the various modern versions (discussed in the

fourth part of the second major section) which

have replaced it.

The cash balance approach, for instance, re-

lied on a fall in effective demand in the backward

country to lead to a fall in money prices. But this

connection between effective demand and the

permanent level of prices is precisely what Marx

denies. Similarly, the price level of commodities

being determined by their value relative to that

of gold, the money wage cannot permanently

influence the price level: the Keynesian price

theory therefore will not work either.

That brings us back once again to the possibil-

ity of purely flexible exchange rates. As noted in

the fourth part of the second major section, the

actual gold standard operated with a flexible

e7c-

change rate bounded by limits (gold-points)

based on the costs of transporting gold. This

meant that in its normal variations it was a

system of flexible exchange rates, whereas in its

“limited” mode it operated as a fixed exchange

rate system.

It is out of this long experience that orthodox

theory falsely abstracted fixed and flexible ex-

change rates as two separate regimes. In this

context purely flexible exchange rates are pre-

sented as a mechanism whereby in theory a

world capitalist system can be made up of fully

“independent” national currencies (Yeager,

1966,

104). As a theoretical possibility this

idea has always had an uneasy existence: the

history of currency “floats” strongly suggests

only a limited flexibility (Yeager, 1966, pp.

176-80),

and the history of the international

money system is very much a history of increas-

ing monetary integration, not separation. In a

sense, the notion of a purely flexible exchange

rate determined solely by supply and demand

considerations is one more manifestation of the

general neoclassical method in which all

“prices” are determined only by supply and de-

mand. In opposition to this, Marx’s method very

rnuc!l

ernphasks

lhe

inlr-irlsic

hails

these

apparent variations: in the case of prices, these

arose from labor-times; in the case of exchange

rates, from the existence of the money commod-

ity (as in gold-points).

The law of value in international exchange

Perhaps the most fundamental result to emerge

from Marx’s criticism of Ricardo is

the

crucial

distinction between value and price. Money

mice. to Marx. is the external measure of the

225

value of a commodity. The very nature of com-

modity production requires not only that every

commodity be assessed in terms of some univer-

sal equivalent (hence the necessity of money),

but also that this assessment be contingent on a

series of factors, ranging from the vagaries of

supply and demand to the social limits imposed

by reproduction (hence the ultimate regulation

of market prices by value).

Marx’s analysis of the exchange of commodi-

ties within a nation is thus characteristically dis-

tinct from Ricardo’s. In what follows we shall

see that it is these very same differences which

necessarily imply an equally distinct Marxian

analysis of international exchange.

Comparative costs reexamined. We begin once

again with the familiar Ricardian tableau (Table

13.2). Portugal is absolutely more efficient in

both branches of production, and given the

value of

gold33

as two worker-hours per ounce,

this greater efficiency translates directly into an

absolute cost advantage. Portuguese capitalists

will therefore export both cloth and wine, and

England will have to counterbalance its ensuing

trade deficit by shipping gold to Portugal.

According to Ricardo, the gold outflow from

England would lower all prices there, since it

would lower the domestic supply of money; con-

versely, the gold inflow into Portugal would raise

the prices of all Portuguese commodities. As we

have seen, this process implies that sooner or

later English cloth would undersell its Por-

tuguese counterpart, so that in the end two-way

trade would always reign. No nation need fear

trade, for it benefits all.

But the mechanism which leads us to this har-

monious conclusion rests squarely upon the

operation of the classical quantity theory of

money, And this we know to be false. Let us

therefore begin again.

Because of their absolute advantage, Por-

tuguese capitalists in both branches are able to

undersell their English competition. Portuguese

cloth and wine invade English markets, and

English gold begins to flow back to Portugal. In

England, therefore, the supply of gold de-

creases, while in Portugal it increases.

It is at this point that Marx’s theory of money

becomes critical. In contrast to Ricardo, Marx

Table 13.2.

England Portugal

Cloth: 100 hrs 50 oz gold 45 oz gold 90 hrs :CIoth

Wine: 120 hrs 60 oz gold 40 oz gold 80 hrs

: Wine

, I

226 Anwar Shaikh

expressly denies any link between pure changes

in the supply of gold and the level or prices.

Instead, according to Marx’s analysis, the pri-

mary effect of an outflow of gold from England

will be to diminish the supply of loanable

money-capital. On the other hand, as English

cloth and wine production succumbs to foreign

competition, the demand for money-capital will

also decrease. Nonetheless, when these sectors

have reached their minimal size (there will

always be Englishmen who will never buy from

foreigners), the continuing drain of gold will tend

to raise the rate of interest; insofar as this cur-

tails investment, production of other commodi-

ties will decline. In England therefore, the drain

of bullion will lead to lower bank reserves, cur-

tailed production, and a higher rate of interest.

In Portugal, the effects are just the opposite.

As gold flows into Portugal, part of it will be ab-

sorbed by the expanded circulation require-

ments of cloth and wine production; part will be

absorbed in the form of luxury articles; and the

rest will be absorbed in the form of expanded

bank reserves. This last effect will increase the

supply of loanable money-capital, lowering

interest rates and tending to expand production

in geneI-al. Thus, in Pmtugal, the inflow uf gvld

will raise bank reserves, expand production, and

lower the rate of interest.

What we find therefore is that according to

Marx’s analysis England’s absolute disadvan-

tage will be manifested in a chronic trade deficit,

bulanced by a persistent outflow of gold. On the

other hand, Portugal’s greater efficiency in pro-

duction will manifest itself in a chronic trade

surplus, balanced by a persistent accumulation

Obviously such a situation cannot continue

indefinitely.

If we stick to commodity flows

alone, then as English bank reserves decline, so

too will the credibility of the English

eventu-

ally, the

must collapse, and with it the trade

between England and Portugal.

The end need not come in such a straightfor-

ward manner, however. We noted earlier that as

English reserves shrink, the rate of interest in

England will rise; conversely, as money-capital

piles up in Portugal, the rate of interest there will

fall. At some point, therefore, it will be to the ad-

vantage of Portuguese capitalists to lend their

money-capital abroad, in England, rather than at

home. When this happens, short-term financial

capital will flow from Portugal to

England;35

England’s rate of interest would then reverse it-

self and begin to fall, while Portugal’s would

rise, until at some level of short-term capital

flows the two would be equal.

It may seem that at this point the s

would be balanced: England running aituation

chronic

trade deficit which it covers by means of

short-

term international borrowing, and Portugal run-

ning a trade surplus which enables its capitalists

to engage in international lending. But of course

this is not quite correct: capitalist loans are

made in order to get profit (in the form of inter-

est). Thus England would have to eventually pay

back not only the original loan, but also the

interest on it. The net effect must be an

outJEow

of gold from England, albeit at a later date. All

other things being

equal,36

the piper must be

paid: in the end, beset by chronic trade deficits

and mounting debts, England must eventually

succumb.

The foregoing results take on an unpleasantly

familiar ring when we express them in terms of

developed and underdeveloped capitalist coun-

tries. Curiously enough, in Ricardo’s example

England corresponds to the under-developed

capitalist country (UCC), its generally lower ef-

ficiency being the reflection of its lower level of

development. Portugal, on the other hand, cor-

responds to the developed capitalist country

(DCC).

Cast in these terms, we may say: in free trade,

the absolute

discndvantage

of the

undevde-

veloped

ccrpitulist

country will

r~su11

in chronic

trade dejkits und mounting international bor-

rowing. It will be chronically in deficit und

chron-

icully

in debt.

In our analysis so far, we have assumed only

two commodities, so that an absolute advantage

implies greater efficiency in producing both: oth-

erwise it would obviously be a relative advan-

tage. But when we consider the whole range of

products possible in both countries, then it be-

comes evident lhat in

spik

of a gm~-uZ supcl.iur-

ity in production, the DCC may nonetheless pro-

duce certain commodities at a greater cost than

the UCC, and yet others not at all. Since we are

still considering direct prices, the only possible

exports of the underdeveloped country will con-

form precisely to these types: commodities it

can produce at a lower value and/or those com-

modities peculiar to it

only.37

On the whole,

these types of commodities will reflect some

specific local advantages great enough to over-

come the UCC’s generally lower level of effi-

ciency: a good climate, an abundance of particu-

lar natural resources, a propitious location, and

so on; lower wages, however, will not matter

here, since in the case of direct prices the level

of wages affects profits but has no effect on

prices. Under these circumstances, then, the

underdeveloped country will be able to eke out a

few exports; although, of course, its overall

trade will still be in deficit, and its position still

that of a debtor nation. Trade will serve not to

eliminate inequality, but to perpetuate it.

The laws oj’international exchunge

227

This result is’not substantially modified by the

consideration of prices of production. Since

within a given country the average price of pro-

duction is equal to the average direct price, the

overall advantage of the DCC remains un-

changed. What may change, however, are the

trading positions of individual sectors. Within

each country, sectors with high organic compo-

sitions will have prices of production above their

direct prices, and sectors with low composi-

tions, prices of production below their direct

prices; but this dispersion

effGct

holds true in

both countries, to differing degrees, so that it is

quite possible that in either country some pre-

viously marginal sectors may enter international

competition while others drop out.

What we are left with, therefore, is that in gen-

eral the developed capitalist country will domi-

nate trade because its greater efficiency will

enable it to produce most commodities at abso-

lutely lower values, and hence, to sell them on

the average at absolutely lower prices of produc-

tion.

Above all, it must be kept in mind that these

results represent the automatic tendencies of

free and

unhumpered

trade among capitalist na-

tions at different levels of development. It is not

monopoly or conspiracy upon which uneven

development rests, but free competition itself:

free trade is as much a mechanism for the con-

centration and centralization of international

capital as free exchange within a capitalist na-

tion is for the concentration and centralization of

domestic capital. We will return to this point

after we consider the effects of direct invest-

ment

Incidentally, it is worth remarking that trade

between capitalist nations with more or less the

same level of development will have a character-

istically different pattern. Suppose we consider

the example lying at the heart of the Hecksher-

Ohlin-Samuelson model, in which both capitalist

countries possess the same technology and level

of productivity

so that absolute advantage is

impossible. In this limiting case, factors such as

climate, location, avail;lbility of resources,

experience, inventions, and above all the com-

petitive struggle among capitalists, become all

important. We would expect a more or less bal-

anced pattern of trade in this case, with a large

variety of goods being produced in both coun-

tries, and with the advantage in particular com-

modities shifting back and forth in the short-run.

This is quite different from the structural imbal-

ance of DCC-UCC trade.

The effects of direct investment. It is traditional in

the analysis of international trade to separate

commodity flows from

flows

of capital (direct in-

vestment). The law of comparative costs is then

used to justify the patterns of commodity trade,

while direct investment is treated (separately) as

a transfer of savings from the rich capitalist na-

tions to their poor relatives.3s The underde-

veloped capitalist nations thus emerge as doubly

blessed: the overwhelming productive superior-

ity of the developed nations is manifested only in

the cheapness of their exports, while their

incumyarably

greater wealth manifests itself as a

mass of capital eager and willing to go over there

and help spread freedom, equality, property,

and Coca-Cola.

The preceding section has demonstrated that

the law of comparative costs is invalid even on

its

owy2

groutids.

The concentration and central-

ization which is inherent in capitalist production

is as much a part of world capitalism as it is of

any single national entity; no form of exchange,

be it national

inturliztiunal,

can do more than

to give vent to the fundamental laws of capitalist

production. Rather than negating the inequality

of development, commodity trade affirms and

reinforces it.

But then what are we to make of the existing

analyses of the effects of direct investment?

On one hand, orthodox economic analysis

argues that direct investment “redistributes

world savings’ ‘I(Kenen, 1968, p. 29) from the

rich capitalist

nalions

the

yuu~-

ones, which

tends to eliminate international inequality by

slowing down the growth of the investing coun-

tries and speeding up the growth of the recipient

countries. As such, might it not offset the

inequality-widening effects of commodity trade?

On the other hand, as I outlined earlier, both

conventional Marxist analysis and that of Em-

manuel rely heavily on the export of capital as

being the critical factor in modern imperialism.

But both analyses are based on an explicit

acceptance of comparative (instead of absolute)

advantage, a law which we now know to be

incorrect. To what extent, therefore, does the

overthrow of this law also modify either or both

of the above theories of imperialism?

These issues lead us directly to the central

question of this section: how does the consider-

ation of direct investment modify the previously

derived law of international exchange? In order

to answer this, we begin by developing the de-

terminants of foreign investment.

Let us recall the results of merchant capital

(i.e., commodity) flows: on the average, the

absolutely greater productive efficiency of the

DCC translates into lower international prices

for its products. If we consider products whose

consumption is common to

both,3g

the DCC will

dominate trade, with the UCC managing to eke

out exports only in those sectors where local

228 Anwar Shaikh

advantages such as climate, availability of

resources, etc.

are

so great as to offset their gen-

erally lower efficiency.

We must keep in mind the elements of this re-

Iationship. The

DCCJ

has the advantage precisely

because it has a more developed structure of

pruduction, two aspects of which are of impor-

tance here: first, a superior technology; and sec-

ond, a work-force more conditioned to capitalist

production. The

UCC,

on the other hand, has an

inferior technology and a work-force which is

still new to wage-labor. The greater efficiency of

production in the DCC is therefore due partly to

the superior technology, and partly to the higher

direct productivity of its work-force. The term,

“direct productivity,” refers to the fact that

even when both work-furces use the same tech-

nology, the work-force of the DCC is likely to be

able to produce more output, because of its

greater conditioning to capitalist production, its

greater familiarity with machines, etc.

On the basis of these differences, then,

merchant-capital will facilitate trade between

the two countries in those commodities which

are of use

either country.

3ut

note that so long

as the differences in development manifest

themselves in the above-stated ways, the means

of production of the two countries will not be

among the traded commodities: each country’s

capitalists will use means of production consist-

ent with its general level of development.

Merchant capital necessarily carries with it

the possibility

o-F

modernization, however: the

capitalists within the UCC may (and do) switch

over to the superior technology of the DCC. But

there are many factors which militate against

this: the vastly greater cost and scale of ad-

vanced techniques, the complex interdepen-

dence required among different techniques for

any one to be viable, and the greater socializa-

tion required of the work-force. For these

reasons, modernization from the inside as an

inherent tendency of trade relations is usually

overwhelmed by another more powerful inher-

ent tendency: nodenzizaGon from the outside,

or direct investment.40

Precisely those factors

which

work against

modernization from the inside tend to work in

favor of direct investment: capitalists from the

DCC have much larger capitals available for in-

vestment, are familiar with modern techniques,

have access to all the necessary skilled workers.

But the most important factor which favors

direct investment, as we shall see, is the low

level of wages in the UCC.

During the analysis of commndity trade, wage

differences did not appear to be an important

factor. In the case of direct prices, price is deter-

mined immediately by value: wages affect only

the rates of profit. In the case of prices of pro-

duction, because the wage rate affects the

average rate of profit, it can affect the extent to

which individual prices of production deviate

from direct prices; but the average price is still

directly connected to value. Up to this point,

therefore, it has been necessary to focus on

dif-

ferences in productive efficiency as the most im-

portant manifestations of uneven development,

even though differences in wage rates between

DCC and UCC are just as symptumatic of the

disparity between their levels of development,

Once we admit the possibility of internationai

movements of industrial capital, however, wage

disparities between capitalist nations become an

important factor in their own right.

Consider the case of an individual capital in

the DCC. If we ignore transportation costs, then

the same price rules everywhere. Thus, it

wiII

take more

Iess

the same amount of gold

build and supply a given type of plant anywhere

in the world: the sole difference between coun-

tries will therefore arise from the differing costs

of labor-power; that

is?

from the combined

ef-

fects

of the differences in direct productivity and

the differences in wage rates.

In Uneylrul Exchunge . . . , Arghiri Em-

manuel points out that though the direct produc-

tivity of labor is generally lower in the UCC,

tlze

wage rate is much lower still: whereas the direct

productivity “of the average worker in

tlze

underdeveloped areas is

to 60 percent of

that

of the average worker in the industrialized

areas . . . the average wage in the developed

countries is about 30 times the average wage in

the backward countries” (Emmanuel, 1972,

48). This means that although it takes roughly

twice as many workers in the UCC to produce

the same output from a given plant

&U-I

would

at home, each worker costs the developed

country’s capitalist only I/30 of what workers

cost at home; the net effect is that the average

wage bill of a plant located in the UCC would be

/I5 of what it would be at home: cheap labor at-

tracts foreign investment.

It must he

emphasi7ed

at this

pint

that cheap

labor is not the only source of attraction

for

foreign investment. Other things being equal,

cheap raw materials, a good climate, and a good

location (if transportation costs are taken into

account) are also important in making individual

sectors of production attractive to foreign capi-

tal. But these factors are specific to certain

branches only; cheap wage-labor, on the other

hand, is a general social characteristic of under-

develcqwd

capitalist crrtlntries,

one

whnse

impli-

cations extend to all areas of production, even

those yet to be created.

One immediate consequence of considering

The laws of international exchange

direct investment is that the export industries of

the UCC emerge as the prime targets of foreign

capital. As we have already seen, when we treat

flows of merchant capital, the only sectors of the

UCC capable of surviving are those whose prod-

ucts have no foreign counterparts, so that they

face no competition from imports, and those

which do face foreign competition but can over-

come it due to local advantages such as plentiful

raw materials, etc., which enable them to offset

their generally inferior technology and lower

labor productivity. The latter group of sectors, if

they exist at all, become the export sectors of

the UCC. And once the possibility of foreign in-

vestment is taken into account, these export

sectors become leading candidates for foreign

takeover: even if foreign capitalists had to ship

over workers from their own country their supe-

rior technology would still enable them to take

advantage of the cheap raw materials, etc., to

make exceptional profits; in addition, since labor

in the UCC is available at a lower net

cost,41

the

export sectors begin to appear even more attrac-

tive to foreign investors.

The sectors confined solely to domestic pro-

duction are not exempt from this process, how-

ever. Insofar as there exist within this group cer-

tain industries in which the superior technology

of foreign capital and the lower net cost of do-

mestic labor power enables the capitalists from

the DCC to make higher profits there than they

would at home, these industries too will be prey

to the foreign invasion.

In all the sectors subject to this discipline,

foreign capital enters because by selling at or

even below the existing prices, it can enjoy a

higher rate of profit than the rate which rules at

home. The existing prices, however, are the

prices of production of these sectors, embodying

the average rate of profit in the UCC. At first

glance therefore, it would seem that direct in-

vestment would only flow from the DCC to the

UCC if the former’s average rate of profit was

higher than the latter’s

because of the lower

wage, for instance, in the UCC. But this is not

necessnq~ nt

n/Z.

By modernizing from the out-

side, foreign capital lowers the cost-price of a

commodity and so raises its profitability. Thus

even if the national rate of profit in the UCC

were below that of the DCC, the sectors moder-

nized by foreign capital could still yield for it a

higher rate than either national

average.42

Regardless of the actual differences in the

average rates of profit of the two countries,

therefore, foreign capital will seek to enter those

particular industries in which it can enjoy a

higher profit (at the going prices) than it would

at home. As it does so, however, the competi-

tion among foreign canitals for these excess

229

profits will lead to an increase in the supply of

the commodities produced, driving down their

prices and hence reducing the excess profits

which attracted them in the first place. No

matter where this process stops, it is clear that it

will end up lowering the prices of the chosen in-

dustries until the foreign capital invested in them

earns the same rate of profit as it would at home.

From the point of view of local capital the ef-

fects of foreign investment will generally be

disastrous. The prices which existed before the

modernization from the outside were prices of

production embodying the average rate of profit

in the UCC. When these prices are driven down

by the influx of foreign capital, the domestic cap-

italists will be forced out

out of business, into

yet unaffected areas or into new industries

created in response to the needs of the foreign

dominated sectors.

We have up to now confined ourselves to ana-

lyzing the effects of direct investment on indus-

tries already existing in the UCC. Given that

only a few industries would survive the rigors of

commodity trade, the question that arose was:

will direct investment help offset the devastation

of competition from foreign imports, or will it

make matters worse?

From the point of view of local capital, the

answer seems unambiguous: worse! Struggling

to exploit their workers in peace, they find them-

selves beset by foreign devils: first their indus-

tries are ruined by cheap imports, and then those

that survive are taken over by foreign capital! It

is no wonder that protectionism becomes their

religion.

The invasion and takeover of existing indus-

tries in the UCC does not, however, exhaust the

possibilities inherent in direct investment. It

must be remembered that all capitals compete

against each other. This means that when capital

from the DCC takes the form of foreign invest-

ment it competes not only with capital from the

UCC but also with capital still at home. Where it

can take advantage of the cheap labor in the

UCC, new capital in the DCC can set itself up in

oppositiorz

to existing

hor72~

irduslries,

opening plants abroad and exporting the

(cheaper) products.

We see, therefore, that attraction of cheap

labor for foreign capital can be detrimental not

only to local capitals in the UCC but also to cer-

tain capitals in the DCC. It is for this reason that

the cry for protectionism resounds on both sides

of the development gap. Where merchant capital

dominates, or where foreign investment is still

no threat to home capital, then only the plaintive

wail of UCC capitalists is heard in favor of pro-

tectionism. But when foreign investment

develops to the point of competing with home

230 Anwar Shaikh

production itself, the protection quickly be-

comes the reality of the day. Only the free

traders remain, tirelessly selling the patent medi-

cine of comparative costs.

From a nationalist point of view, the effects of

direct investment on the UCC seem mixed. We

have seen that merchant trade will be dominated

by the DCC; the UCC will emerge as perpetually

in debt and perpetually in deficit.

Insofar as foreign capital invades the sur-

viving industries, it adds insult to injury by

increasing the dependence of the UCC on the

developed capitalist world. Direct investment, it

is true, does lower prices and modernize in-

dustry; but, as Emmanuel emphasizes, lowered

prices of exports are actually a loss to the

nation-as-a-whole, since they constitute a deteri-

oration of the terms of trade and hence a worsen-

ing of the trade balance. Moreover, for Em-

manuel the important point would be that both

modernization and the lowered prices are in fact

mechanisms by which the surplus-value pro-

duced by workers from the UCC is in fact trans-

ferred to the foreign capitalists. This, he argues,

further widens the gap between developed and

underdeveloped countries; by strengthening the

rich and weakening the poor: “wealth begets

wealth . . . Poverty begets poverty” (Em-

manuel, 1972, p. 131).

What Emmanuel does not see, however, is

that foreign investment may also transplant in-

dustries from the DCC to the UCC, because of

the advantages of cheap labor. lnsofar as this

happens, the export capability of the UCC is

strengthened (albeit under the aegis of foreign

capital) by the addition of these new sectors.

This side of foreign investment will tend to im-

prove the underdeveloped nation’s balance of

trade, and create new avenues of employment

for its labor.

The fundamental error in Emmanuel’s analy-

sis, however, is much more basic: because he

accepts the law of comparative costs as being

correct on its own grounds, he is forced to put

the whole blame for international inequality on

the effects of direct investment. Since he iden-

tifies the lower wages of the UCC as the basic

factor leading to foreign investment, Emmanuel

must argue that the sollrtion to the problem of

uneven development is to eyuulize wuges he-

tween countries. By so doing, the flow of

industrial capital from the DCC to the UCC

would cease, and with it all the deleterious ef-

fects which arise from it.

But we know that in fact Ricardo’s law of

comparative costs is wrong: quite independently

of direct investment, commodity trade by itself

will result in the penury of the underdeveloped

capitalist country. If anything, direct investment

can be an “offset” of a sort, albeit one which

eventually intensifies the unevenness of devel-

opment: inflows of foreign capital, even though

they may be eventually repaid many times over

in outflows of profit, are nonetheless an impor-

tant source of long-term borrowing to offset the

chronic trade deficits, ones which are generally

preferable to the volatile financial capital flows

upon which short-term borrowing is based,

Moreover, as noted above, direct investment

can lead to the creation of new industries in the

UCC, which can help reduce its trade deficit as

well as increase employment within the country.

The basic point, which Emmanuel’s proposed

solution completely misses, is that you are

damned if you do, and damned if you don’t.

What Emmanuel sees as an inequality between

nations is in fact the international manifestation

of the inequality between capitals which is inher-

ent in the necesstrvily uneven development of

capitalist relations of production. Concentration

and centralization as inherent tendencies of cap-

italist development are just as valid internation-

ally as they are nationally. In either case, the

patterns of exchange are symptoms, not causes,

of these fundamental laws, The international

equalization of wage rates can no more solve the

problem of uneven development in capitalism

than can the suppression of a symptom cure the

disease. The problem lies with capitalism, not its

symptoms: to argue for the same wage every-

where is in reality to argue that the exploitation

of workers should be equal in all

countries43

without reference to race, color, creed, or na-

tional origin! Democratic, no doubt, but limited

in its implications.

Summary and conclusions

The purpose of this chapter has been to work

towards the treatment of the laws of interna-

tional exchange from the Marxist perspective.

This is a theoretical task, one which has its roots

in the law of value as it is developed in the

SUC-

cessive volumes of Capital. As such, this analy-

sis is not a substitute for the concrete reality of

international trade or of its historical develop-

ment. No attempt is made, for instance, to

explain the historical roots of uneven devel-

opment

;

nor is primitive accumulation ever

treated. Instead, the point is to uncover the sorts

of forces which are inherent in the international

interactions of capitalist nations precisely so

that we may be better- prepared to

with

tlxir

concrete existence.

Perhaps the most enduring proposition in the

The laws of international exchange

analysis of international trade has been the

so-

called law of comparative costs, which, as we

have seen, has generally been accepted by

orthodox economists and Marxists alike as being

valid on its own grounds. In all of its various

disguises, this so-called law has asserted that

when it came to international trade between cap-

italist nations, inherent inequalities will be

negated. Thus even if one of two nations cmld

only produce all commodities at a higher price

than the other, it would nonetheless end up ex-

porting some and importing others. No nation,

however humble, need ever fear “free trade,”

for, like bourgeois justice, it is blind to dif-

ferences in station. Or so the story goes, any-

way,

But it turns out that aside from the multitude

of proofs about the “optimality” of specializa-

tion according to comparative costs, the real

heart of the matter lies in the assertion that the

basic thrust of international trade is to actually

bring about such specialization. And the auto-

matic mechanism which supposedly accom-

plishes this, we found, was the operation of the

various orthodox theories of money.

The second part of this chapter therefore pre-

sented the development of the principle of com-

parative costs in its original (and basically unal-

tered) form: that of David Ricardo. Only then

were modern derivations of this law presented.

It was important in this section to show that the

so-called law was a logical outcome of the con-

junction of Ricardo’s theory of value with his

theory of money; this enabled us to establish

that the locus of a critique of the law lay in its

antecedents

not in the law itself.

In his analysis of Ricardo, Marx provides us

precisely with the necessary critiques of Ri-

cardo’s theories of value and money. Moreover,

in his own work he treats these subjects under

the developments of the law of value. The third

section of this chapter presented Marx’s critique

ofRicardo as well as his own treatment of value,

price and money. This has a double conse-

quence: the critiques of these antecedents of the

su-called law of comparative costs provides us

with a basis for a critique of the law itself; and

Marx’s own development of the law of value

provides us with the basis for an adequate treat-

ment of the laws of international exchange. And

when this is done the law of comparative costs is

seen to be impossible precisely on its own

grounds. Rather than finding, as Ricardo did,

that Portugal and England will each end up spe-

cializing in one commodity

in spite of Por-

tugal’s absolure superiority in the production of

both

we find that Portugal will necessarily ex-

port both. England. the

underdevehed

capital-

231

ist country in this example, will end up with a

persistent trade deficit balanced by gold out-

flows and/or short-term borrowing.

When this result is expressed in terms of its

real content, we can say: free trade will ensure

that the underdeveloped capitalist country will

be chronically in deficit and chronically in debt.

It is ahsolute advantage, not comparative, which

rules trade.

This result represents the extension of Marx’s

law of value (which in Marx subsumes a theory

of money) to the realm of the international ex-

change of commodities. But as Marx points out,

these commodities are capitalistically produced

commodities, the commodity-form of various

national capitals. As such, the interchange of

commodity-capitals among nations carries with

it the seeds of other forms of international capi-

tal,

such as financial capital (foreign bor-

rowing/lending), and direct investment.

The question of direct investment is particu-

larly important, since its analysis plays so im-

portant a role in various theories of trade. Ortho-

dox theory, for instance, finds direct investment

to be a means of closing the gap between rich

and poor capitalist countries, on the grounds

that it transfers savings from the developed

countries to the underdeveloped ones. Marxist

theories of imperialism, on the other hand, have

traditionally derived the major phenomena of

uneven development from direct investment; in

this regard Emmanuel, too, makes the export of

capital pivotal in his theory of imperialism.

But all these analyses of direct investment are

based on an acceptance of Ricardo’s law of com-

parative costs. Since the central result of this

paper is the overthrow of this law, and the sub-

sequent location of many of the phenomena of

imperialism

previously attributed to the export

of capital

in the workings of commodity trade

alone, it became imperative at that point to ex-

tend the analysis to incorporate the effects of

direct investment.44

In the second part of this chapter’s final sec-

tion, this question was taken up. There, it was

found that though foreign capital can provide an

offset to chronic balance of trade deficits, in part

because of the capital inflow and in part through

the modernization and expansion of the export

sectors, it does so only at the expense of an

eventual capital outflow (surplus-value trans-

ferred out in the form of repatriated profits), de-

clining terms of trade, and increased foreign

domination. Instead of negating international

inequality, therefore, foreign investment tight-

ens the grip of the strong over the weak

not

merely through monopoly or state power, but

through “free” competition itself.

232 Anwar Shaikh

There are many aspects of this analysis which

need to be developed further in order to be theo-

retically capable of tackling the concrete history

of trade among capitalist nations. Let me briefly

cite two major areas to be investigated.

First, there is the question of a fuller develop-

ment of Marx’s theory of money to account for

different forms of money and credit, so that we

may trace their effects on the previously derived

laws of money. This is a complex and controver-

sial task, in which not only must the tangled his-

tory of monetary phenomena be theoretically

absorbed, but also the various modern (Keynes-

ian, monetarist) theories of money be con-

fronted. In recent times there has been a rapid

reawakening of interest in distinguishing a

Marxist theory of money from its various ortho-

dox counterparts, and a growing number of peo-

ple are now focusing on this task (de Brunhoff,

1967; Foley, 1975).

Second, there is the question of distinguishing

monopoly from concentration and centraliza-

tion. It was Marx’s concern to show that con-

centration and centralization are immanent ten-

dencies of capitalist development, fostered pre-

cisely by what Marx calls the “competition of

capitals;’

’

it has been the intention here to dem-

onstrate that precisely the same thing occurs

in-

temationally , for precisely the same reasons. To

some Marxists, however, concentration and

centralization imply monopoly; and monopoly

being the opposite of free competition, it signals

the end of the law of value and the beginning of

the era of monopoly capital (Sweezy, 1942,

54). I would argue, however, that this notion of

monopoly is inadequate; it stems largely from

orthodox theory, whose analysis is located in

the sphere of circulu tion, and refers to the ability

of individual capitalists to control and influence

the conditions of purchase and sale. As I out-

lined in the third section of this chapter, Marxian

analysis is located primarily in production and

reproduction; as such, it is not a question of the

will of individual capitalists, but of the limits im-

posed upon them by those sets of relations

which define the capitalist mode of production.4s

The analysis of the manner in which these limits

manifest themselves is what the term law of

value means in Marx; in this regard, the compe-

tition of capitals is not to be understood as the

opposite of monopoly, and the era of monopoly

capital need not be severed from the law of

value:

In practical life we find not only competition,

monopoly and the antagonism between them,

but also the synthesis of the two, which is not

a formula but a movement. Monopoly pro-

duces competition, but competition produces

monopoly. Monopolists are made from

com-

petition; competitors become monopolists

. . . the more the mass of the proletariat

grows as against the monopolists of one

na-

tion, the more despemte competition becomes

between monopolists ofdifferent nations. The

synthesis is of such a character that monopoly

can only maintain itself by continually en-

tering into the struggle of competition. (Marx,

1971, p. 152, emphasis added)

In any case, these are concerns to be followed

up elsewhere. The central focus here has been

the manner in which the inherent tendencies of

capitalist development manifest themselves in-

ternationally. The law of uneven development,

of the concentration and polarization of wealth

which characterizes capitalism, can be seen to

manifest itself in the form of a widening gap

between poor and rich capitalist nations

not

due to some external factor or political conspir-

acy, but precisely as the necessary form of devel-

opment of free trade. This gap and its attendant

consequences are symptoms, not causes: the

cure must address itself to the disease.

Notes

Sexism is proved tu be buth ratiurml arld

efXcienl:

men and women enter the marriage market with

various initial endowments consisting of

home-

capital and market-capital: men being in general

relatively more endowed with market-capital, and

women with home-capital, they specialize to their

mutual advantage in market and home activities

respectively (Becker, 1973, 1974)

The potential of

this fantastic analysis is, I feel, not even

ap:

proached

by Becker’s use of it. What about blacks

and whites

Nazis and Jews? Surely there is

much more work still to be done.

(p,/p,)

= relative price of cloth to wine in

country

Then

if~Pc/Pw)l

~PclPuA

~Pw/P,hz

(Pw/PJl*

One definition of absolute efficiency would be that

if both countries had the same currency and the

same level of money wages, the more efficient pro-

ducers would have lower costs.

Similarly the scalar differences in production func-

tions in different countries for the same good can

also be interpreted as indexes of absolute advan-

tage (Arrow, et al., 1961).

This is a period that by most accounts dominates

the history of capitalism up to at least 1914, and by

some accounts up to the 1960s. In any case, the

period under consideration is one in which pre-

cious metals function as the ultimate international

money; this by no means excludes the phenomena

associated with token money and credit money.

Though I do not develop the different forms of

money here, the analysis outlined here can be ex-

tended to deal with token and credit money based

on a commodity money (gold, silver, etc.).

The laws of international exchange

233

6 Graham’s examples, in a manner similar to

Leon-

tief s anomolous results, have come to be sancti-

fied under the name of Graham’s paradox.

7 Properly speaking, neo-Keynesian analysis seeks

to trace the short-run consequences of changes in

patterns of trade, rather than attempting to specify

the actual determinants of trade. It is therefore

often presented as a complemerzt to the law of com-

parative costs.

8 Barrat-Brown surveys various arguments blaming

“seclionalisl

rnoriopoly

and

ubstl

ul;tiunist

yrinci-

pies,”

“postcolonial nationalism and self-imposed

autarchy ,

’

“trade union action,” and the inequal-

ity of “bargaining power” between developed and

underdeveloped capitalist countries, for the his-

torical inapplicability of free trade arguments

(Bar-rat-Brown, 1974, pp. 32, 35, 38, 233).

9 It might be added that a satisfactory resolution of

the problem of price formation in competitive capi-

talism (the so-called transformation problem) may

well point the way to a better treatment of monop-

oly. An inadequate

undtxstanding

of the former

would almost surely hinder the development of a

satisfactory understanding of the latter.

10 “The behavior of labor remains a matter of indif-

ference for the application of the law of compara-

tive advantage, the sole condition, both necessary

and sufficient, for this proposition being the mobil-

ity of capital” (Emmanuel, 1972, pp. xxxi-ii).

11 Emmanuel does not abandon the law of compara-

tive costs, even for the modern world. Rather, he

sees the modern law to be the sum of two pro-

cesses; first, the formation of international

prices

of production via international equalization of the

rate of profit; and second, specialization according

to comparative costs, where comparative cost

ratios are determined precisely by the international

prices of production. In Chapter 6 of

Urmpal

Ex-

change . . . , he illustrates the effects of unequal

exchange on the pattern of specialization. assum-

ing throughout that this pattern is based ultimately

on comparative costs.

12 The term Third World is used occasionally

throughout this chapter in deference to its wide-

spread popularity. It is, however, a very mislead-

ing term in that it suggests a separation between the

poor capitalist countries and world capitalism.

13 Emmanuel particularly emphasizes stagnation,

poverty, a widening “development gap,” and de-

clining terms of trade for Third World countries

(Emmanuel, 1972).

14 It is clear from Emmanuel’s analysis that capital-

ists are free to use the best technique of production

available. On page 6

he refers to the example of

page 63, which assume the same technology in both

countries (Emmanuel, 1972).

15 Emmanuel’s analysis tends to be posed in terms of

nations as the primary units, not classes.

16 It is worth remembering that Proudhon’s philoso-

phy of poverty also depends on a notion of equal

exchange.

17 It is interesting to note that Marx’s reaction to

Ri-

cardo,

for example, is critical, appreciative, and

nonpolemic. This is different from Marxist critics

of Emmanuel (who might rightly be called a

neo-

Ricardian).

18 The natural prices of Ricardo and the prices of pro-

duction of Marx currently go by a variety of names,

the most common being “long-run equilibrium”

prices. We will stick to Marx’s terminology here.

19 Adam Smith of course postulated a

precapitalist

law of prices in which relative prices

equalled

rela-

tive labor-times. In that sense, one could claim that

Smith dealt with a case in which there were no cap-

italists. But this has nothing to do with ignoring

means of production, which is what neoclassical

asxrtiurls

abuut

Ricardo and Smith amount to.

20 In fact, the gold standard operated with exchange

rates which could vary within certain limits. These

limits, called gold-points, determined whether it

was cheaper to change local currency into foreign

currency via the exchange-rate, or to buy gold with

the local currency and spend the gold abroad. The

basic determinant of the gold-points was the cost of

transporting gold-bullion from one country to an-

other.

21 In neoclassical presentations, the comparison is

between price ratios of cloth and wine in each

country, rather than efficiency of production. But

the conclusion is the same.

22 Althusser discusses the methodological break

between Marx and the classical economists

(Alt-

husser, 1970).

23 The distinction between concrete labor and ab-

stract labor is related to (though different from) the

distinction between productive and unproductive

labor. In both cases the properties of value (and

surplus value) producing labor are at the heart of

the distinction.

24 The case of rent is a good example of this method.

Land is not a product of human labor and conse-

quently has no value; yet land has a price. A clear

contradiction in Marx’s theory of value, it would

seem. Not at all, Marx replies. One of the neces-

sary steps in the theoretical transition from value to

price is the formulation of the concept of rent.

Once it is understood how value determines rent,

and it is seen that the price of land is nothing but

rent capitalized (percent-discounted) into a sum of

money, then rather than contradicting the law of

value the price of land affirms it!

25 Marx mentions his treatment of surplus-value inde-

pendently of its fetishistic forms (interest, rent,

profit) as one of the

“

three fundamentally new ele-

ments of’

Capitcd

(Marx to

Engels,

January 8,

1868).

26 See Morishima, 1973, Chs. 5, 6; and Shaikh, 1973,

Ch. IV, Sec. 4. In both of these, it is established

that there is a monotonic relationship between the

money rate of profit

and the Marxian rate of

surplus-value

s/v,

for given conditions of produc-

tion. Of course, the Marxian value rate of profit

S/(C + V) is also a monotonic function of

S/V,

for

given production conditions. Thus the money rate

of profit is a monotonic function of the value rate.

27 The velocity of circulation of money is actually the

rate at which commodities enter and drop out of

circulation. But because money remains within cir-

culation, and commodities enter to be sold and

leave when consumed, it is the money which ap-

pears to cause, rather than measure, the movement

of the commodity.

234 Anwar Shaikh

28 Marx distinguishes reserve funds of coins, which 34 We exclude the case where England is also a

pro-

are really within the sphere of circulation from

ducer

of gold (directly or through colonies), since

hoards, in which gold leaves circulation altogether. that is obviously a special circumstance. If we treat

It is the reserve funds of coins

which.$Psr

manifest gold production as taking place in a third country

an excess of coin (Marx, 1972, p. 137). (South Africa), then the only way for England to

29 Of course, gold bars may appear to be sold for an uc‘quiw gold is through exports to South Africa.

equal weight of gold in the form of coins; but this is

But given the conditions of this example, in which

only a change of form from bullion to coin. It is not England is at a disadvantage in both (exportable)

a sale since there is no price involved: an ounce of commodities, it is Portugal which will export to

gold is an ounce of gold regardless of its shape. The

South Africa, not England.

same conclusion applies to the sale of gold for 35 Under the gold standard, in the event of a drain of

paper money which is backed by gold. In this case gold, the central bank of a country would

fre-

the paper is a token of a quantity of gold equal to quently make money scarce precisely in order to

that which it buys. Marx discusses the illusions to raise the interest rate and attract short-term foreign

which token money gives rise (Marx, 1972). capital (Marx, 1967, Vol. III, Ch. 35, p. 575).

30 It is important to note that in Marx’s analysis, 36 The crucial point of free trade arguments is

pre-

hoarding arises out of structural reasons specific to

cisely that, all other things being

equal,

trade will

commodity production and/or capitalist

commod-

benefit all parties concerned.

ity production. In Keynesian analysis, hoarding is 37 Commodities whose production is peculiar to a

ultimately based on psychologicul propensities. single nation are really subsumed under the

cate-

31 There is no automatic link in Marx’s analysis gory of commodities which can be produced at a

between a fall in the rate of interest and an

expan-

lower cost in that nation than elsewhere.

There-

sion in the level of investment. Investment depends

fore, from now on we will refer only to the latter

ultimately on the possibility of making profits; a more general category.

lower rate of interest raises the net profitability of 38 This is the orthodox analysis of the effects of direct

investments financed out of borrowing. But this investment even though it is generally

acknowl-

does not by itself imply an automatic expansion of edged that the factor-price equalization theorem

investment.

(derived from the Hecksher-Ohlin-Samuelson

32 Marx also notes that it is the empirical association model of commodity trade) eliminates any reason

of price rises with the discovery of new gold mines for international capital flows. According to this

which leads to the idea that the increased supply of theorem, commodity trade alone will equalize

gold

causes

the higher prices. Yet, as he points out, wage and profit rates in all countries, so that there

the discovery of a new, more productive gold mine will be no advantage in foreign investment.

lowers the unit value (w,) of an ounce of gold, and 39 In this analysis we ignore the creation of

consump-

thus raises the price level. This by itself means that

tion patterns, even though they represent an

impor-

more gold would be needed for circulating even the tant aspect of the internationalization of capital.

same mass of commodities. This implies a rise in 40 This by no means implies that it is impossible for a

the sum of prices due to a rise in the price level, particular underdeveloped capitalist country to

with a corresponding rise of gold in circulation. Amodernize from the inside, any more than it is im-

portion of the new gold is thus absorbed by this

in- possible for a particular small capitalist to make the

creased need for circulating gold. leap into the big-time. I am only concerned to

ana-

In addition, as outlined in the text, the remaining lyse the overwhelming tendencies of free trade and

new gold will tend to raise effective demand and competition among capitalist nations within this

hence production. In this case the sum of prices

chapter’s scope.

rises because output rises, and this in turn requires 41 Net cost here refers to the fact that the lower direct

more gold to be in circulation. productivity of labor-power in the UCC is more

On the surface, therefore, what we will observe than offset by even lower wage rates.

in such circumstances is a rise in price accom- 42 Suppose the average rate of profit in the UCC was

panied by a rise in the supply of precious metals 10 percent. Then if copper had a cost-price

extant in the world. To the quantity theorists this 100 oz of gold, its price of production (before

correlation becomes causation; the I-ix in

pl-ice

direct

invcstmcnt) would bc

111’

= 110 oz. Now,

uttributed to the rise in the supply of gold (Marx, even if the average rate of profit in the DCC was 15

1972, 160-65). percent, foreign capital would attempt to enter

33 The value of any commodity is the

uveruge

amount copper production in the UCC if through

modern-

of labor-time required for its production. As such,

ization it could lower the cost-price of copper to say

gold produced in various countries will have a80 oz

because then, at or even under the going

value representing the average of the differing price of copper of 110 oz, this foreign capital could

amounts of labor-time required in the different receive a rate of profit above the 15 percent it

countries (and mines). This distinction between would get at home.

individual labor-time required and the social 43 This, too, is logically impossible. The standard of

average (value) plays an important role in Marx’s living (the real wage) of workers in any country

analysis of rent and surplus profit. Whether the

individual labor-times refer to differing conditions must ultimately be limited by the level of

develop-

ment of its forces of production. By what magic will

of production of gold (different mines) within one the Indian worker be able to achieve the same

country or between countries, does not matter as standard of living as the U.S. worker? The total

so-

far as the value of gold is concerned.

cial

product per capita in India

by any

conceiv-

able index

is lower than the

real

wage

of the U.S.

worker. Even if Indian workers were to consume

their whole social product, real wage differences

would not be wiped out

but of course Indian capi-

tal would bc. Thus the incentive for foreign invest-

ment

wage differences

would remain, while the

competition

the local capitalists

would be long

gone!

44 As noted earlier, the location of uneven develop-

ment in free trade itself implies that we must be

more precise in distinguishing imperialism as a

stage in capitalist development from uneven devel-

opment as an immanent process in all stages. This

task cannot be attempted here. I thank John

Weeks for pointing this out to me.

45 “The will of the capitalist is certainly to take as

much as possible. What we have to do is not to talk

about his

~$1,

but to enquire into his

ponies,

the

limits of that power, and the character of those

limits” (Marx, 1970,

p..

190).

References

Althusser, L., and

Balibar,

E. 1970. Reading Capital.

Ben Brewster, trans. New York: Pantheon

Books.

Amin,

1974.

Accumulation on a World Scale: A

Critique of the Theory of Underdel,elopment. 2

vol. New York: Monthly Review Press.

Arrow, K., Chenery, H. B., Minhas, B., and Solow,

R. W. 1961. “Capital Labor Substitution and Eco-

nomic Efficiency,

’

Review of Economics and

Sructisfics,

Vol. 43.

Barrat-Brown, M. 1974. The Economics of Imperial-

I’sr?x.

New York:

Penguin

Books.

Becker, G. 1973. “A Theory of Marriage: Part I,”

Journal of Political Economy Vol. 81, No. 4.

1974. “A Theory of Marriage: Part II,” Journal of

Politica/ Economy, Vol. 82, No, 2.

Brunhoff, S. de 1967. La Monnaie chez Marx. Paris:

Editions Sociale.

Emmanuel, A. 1972. Unequal Exchange: A Study of

the Imperialism of Trade. New York: Monthly

Review Press.

Foley, D. 1975. “Towards a Marxist Theory of

Money

,’

’

Technical Report No. 181, Economic

Series, Institute

Muthemcrticnl Studies in the

Social Sciences. Palo Alto, Calif.: Stanford Uni-

versity Press.

Hayter, T. 1972. Aid

Imperialism. New York:

Penguin Books.

Jalee, P. 1969. The

Third

World in World Economy.

New York: Monthly Review Press.

Johnson, H. 1968. “International Trade: Theory,”

In-

ternationai

Encyclopedia of the Social Sciences,

Vol. 8, David L. Sills, ed. New York: Macmillan.

Kenen,

B. 1968. “International Monetary Econom-

ics: Private International Capital Movements,”

International Encyclopedia of the Social Sci-

ences, Vol. 8. David L. Sills, ed. New York: Mac-

millan.

LcIiiIi,

V. I. 1939. Imy4riuIi3-m,

thtz

Higkst

Stugc

Capitalism. New York: International Publishers.

Leontief,

W. 1953. “Domestic Production and

Foreign:

the American Capital Position Re-

examined,

’

Proceedings of the Americun Philo-

sophicul Society, Vol. 97.

1956.

“Factor Proportions and the Structure of

American Trader Further Theoretical and Empiri-

cal Analysis,” Review of Economics and Sta-

tistics, Vol. XXXVIII,

1958. “Reply,”

Review of Economics and Statistics

(Supplement) Vol. XL.

Magdoff, H.

1969.

The Age of lmpevialism. New

York: Monthly Review Press.

Mandel, E. 1968. Marxist Economic Theory. Vols. I,

II. Brian Pearce, trans. New York: Monthly Re-

view Press.

Marx,

IS.

1967. Capitak Vol. I, II, III. Moscow: Inter-

national Publishers.

1972. A Contribution to the Critique of Political

Economy. New York: International Publishers.

1973.

Grundrisse.

New York: Penguin Books.

1971. The Poverty qfphilosophy. New York: Inter-

national Publishers.

1969. Theories

@’

Surplus Value, Parts I-III.

Moscow: Progress Publishers.

1970. “Wages, Prices, and Profits,” in

Marx-Engels

Selected Works in One Volume. New York: Inter-

national Publishers.

Minhas, B. S. 1962. “The Homophypallagic Produc-

tion Function, Factor-Intensity Reversals and the

Hecksher-Ohlin Theorem,” Journal of Political

Economy, Vol. LX,

Morishima,

M. 1973. Marx’s Economics. Cam-

bridge* Cambridge

rniversity Press.

Mundell, R. A. 1968. “Balance of Payments,“

Znter-

nutionul E~cyclnpedia of the Social Sciences.

VoI.

8. David L. Sills, ed. New York: Macmillan.

Payer,

C. 1974.

Debt

Trup: The

1,M.F.

and the

Third World. New York: Monthly Review Press.

Pilling, G. 1973. “Imperialism, Trade, and Unequal

Exchange: The Work of Arghiri Emmanuel,”

Economy

und

Society.

Ricardo, D. 1951. The Principles of Political Economy

and Taxation, Vol. I of Collected Works and Cov-

respondence of David Ricardo. P. Sraffa, ed.

Cambridge: Cambridge University Press.

Seton, F. 1957. “The ‘Transformation Problem’,” Re-

view ofEconomic Studies, Vol. 25. pp. 149-60.

Shaikh, A. 1973. “Theories of Value and Theories of

Distribution

,’

’

Columbia University; Ph.D. dis-

sertation.

1977. “Marx’s Theory of Value and the ‘Transfor-

mation Problem’

,’

’

in The Subtle Anatomy of

Cupitulism. Jesse Schwartz, ed. Santa Monica,

Calif.: Goodyear Publishing, pp. 106-39.

Sraffa, P. 1960. Production of Commodities by Means

of Commodities. Cambridge: Cambridge Univer-

sity Press.

Sweezy, P. 1942. The Theory

Cupitalist Develop-

me/It.

New York: Monthly Review Press.

Tooke, T., and Newmarch, W. 1838-57. A History

Prices from

I792

-1856. Reprinted from the origi-

nal published in six volumes, with an introduction

by T. E. Gregory. New York: Adelphi.

Yeagel-,

13.

1966.

Inter~zatiorza/

hdonctavy

Rclatic-)ns:

Theory, History and Policy. New York: Harper

Row.